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FINANCIAL   CHAPTERS 
OF  THE  WAR 


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FINANCIAL  CHAPTERS 
OF  THE  WAR 


BY 
ALEXANDER    DANA    NOYES 

ATTTHOX  OF  "POKTY  YEAKS  OV  AMEKICAN  FINANCE" 


NEW  YORK 

CHARLES  SCRIBNER'S  SONS 

1916 


COPYMOHT,  1916,  BY 

CHARLES  SCRIBNER'S  SONS 
Published  September,  1916 


v^ 


PREFACE 

The  purpose  of  this  book  is  to  describe  clearly, 
and  explain  without  technicality,  the  remarkable 
financial  and  economic  episodes  which  have  at- 
tended the  European  War.  The  general  public 
understood  perfectly,  from  the  very  first  days  of 
the  conflict,  that  its  economic  results  were  cer- 
tain to  be  as  momentous  as  its  political  results. 
But  the  most  experienced  financiers  were  at  loss 
to  say  beforehand  what  the  financial  character 
of  the  war  would  be.  When  it  began,  they  foimd 
it  equally  impossible  to  measure  the  real  signifi- 
cance of  the  first  economic  occurrences.  It  is 
hardly  surprising,  therefore,  that  the  general  pub- 
lic should  have  been  imable  to  understand  what 
had  actually  happened.  Financial  events  were  in 
fact  so  extraordinary  and  complicated  as  to  leave 
the  mind  of  many  readers  of  the  news  in  complete 
bewilderment. 

It  is  my  hope  that  these  chapters  may  serve  to 
clear  up  that  perplexity.  Perhaps  no  questions 
have  been  asked  more  frequently  since  July,  19 14, 
than  the  questions  how  the  fighting  nations  have 
been  able  to  raise  the  $100,000,000  per  day  which 


343413 


vi  PREFACE 

they  are  spending  on  war ;  why  the  seemingly  con- 
vincing prophecy  of  the  shortening  of  war  be- 
cause of  economic  exhaustion  has  not  been  ful- 
filled; what  was  the  meaning  of  that  "deprecia- 
tion in  the  foreign  excha  ';es"  of  which  we  have 
heard  so  much;  whether  Europe  has  lapsed  into 
irredeemable  paper  currency  like  that  of  our  Civil 
War;  by  what  means  the  United  States — largely 
dependent  on  Europe,  in  a  financial  way,  before 
the  war — should  so  suddenly  have  acquired  the 
power  of  paying  off  its  foreign  indebtedness,  fi- 
nancing neutral  nations  from  its  own  resources, 
and  lending  even  to  belligerent  Europe  larger 
sums  than  Europe  itself  had  raised  for  its  earlier 
wars.  Along  with  these  considerations  came  the 
further  inquiries :  Is  this  American  war-time  pros- 
perity tmreal,  temporary,  and  fictitious  ?  Will  the 
conditions  of  19 15  and  1916  be  instantly  reversed 
when  war  is  over  ?  Has  New  York  actually  dis- 
placed London  as  the  financial  centre  of  the  world  ? 
On  these  questions  I  shall  endeavor  to  throw  some 
light. 

It  would  be  presumptuous  for  any  one  to  claim 
ability  to  answer  all  of  them.  One  reason  why 
this  book  bears  its  present  title,  instead  of  being 
described  as  a  financial  history  of  the  war,  is  that 
the  actual  and  relative  importance  of  many  eco- 
nomic phenomena  of  the  period  cannot  be  deter- 
mined conclusively  until  the  war  itself  is  over. 


PREFACE  vii 

But  it  is  possible  at  least  to  give  to  the  general 
public  the  means  of  imderstanding  exactly  what 
has  happened  already.  Every  reader  of  history 
will  agree  with  me  that  the  lack  of  dear  contem- 
poraneous exposition  of  t  j  financial  events  of  our 
own  war  from  1861  to  1865,  or,  even  more  par- 
ticularly, of  the  great  Napoleonic  wars,  is  one  of 
the  greatest  obstacles  to  the  full  historical  com- 
prehension of  those  episodes. 

I  have  drawn  freely  in  this  book  on  my  previous 
discussion  of  the  same  subjects  in  Scribner's  Maga- 
zine,  and  have  also  utilized  an  article  written  by 
me  last  autumn  in  the  Yale  Review.  But  with 
the  recent  rapid  movement  of  events,  economic 
as  well  as  military  and  political,  it  will  readily 
be  imderstood  that  all  previous  comment  had  to 
be  rewritten,  and  that  the  greater  part  of  this 
book  shotdd  be  made  up  of  previously  unpub- 
lished matter. 

A.  D.  N. 

New  York,  September,  1916. 


CONTENTS 

CHAPTEK  PAGE 

I.    Precedent  and  Prediction      .     .        i 

Financial  consequences  of  a  great  European  war, 
as  the  experts  foretold  them — ^The  experience  of 
other  wars — Economic  side  of  the  American  Civil 
War — Of  the  Napoleonic  conflict — Analogies  and 
contrasts — ^The  world's  mistaken  expectations 
when  this  war  began. 

II.    The  War  Panic 20 

Outbreak  of  the  war  and  the  resultant  financial 
situation — How  far  the  markets  were  caught  un- 
prepared— ^The  world-wide  economic  crisis — Rim 
on  the  Bank  of  England — Closing  of  the  stock  ex- 
changes— Suspension  of  gold  payments — A  week 
of  financial  chaos. 

III.  Emergency  Expedients       ...      37 

Protective  measures  of  financial  Europe — ^The 
Bank  of  England  rate — ^Nature  of  the  crisis  in  in- 
ternational credit — ^The  moratorium  on  debts — 
England's  new  paper  currency — Guaranteeing 
non-collectible  loans — ^The  financial  world  on  a 
war  footing. 

IV.  Financing  the  War       ....       53 

Enormous  cost  of  the  conflict — Early  expedients 
of  the  governments  to  raise  money — European 
capital  restricted  to  the  war  loans — England's 
new  taxes  and  the  attitude  of  Germany — ^The  ques- 
tion of  "economic  exhaustion." 
is 


X  CONTENTS 

CHAPTEa  VA.GZ 

V.    Financial  America  and  the  War      75 

What  results  were  expected  in  the  United  States — 
Our  economic  relations  with  the  belligerents — 
Fear  of  a  financial  collapse — Europe's  sales  of 
American  securities — Recall  of  foreign  capital 
from  America — The  "emergency  currency" — ^Na- 
ture of  the  New  York  crisis. 

VI.    The  New  York  Market's  Action      06 

Question  of  meeting  foreign  obligations — Ameri' 
can  bankers  and  the  demands  of  Europe — Volim- 
tary  gold  exports  in  the  face  of  panic — Passing  of 
the  financial  crisis — Removal  of  the  emergency 
expedients — ^The  new  banking  system  and  its  bear- 
ing on  the  situation — ^Reopening  of  the  stock  ex- 
change. 

VII.    The  Second  Period       .     .     .     .     115 

Course  of  events  preceding  the  economic  changes 
of  1915 — Incidents  in  European  finance — ^Accu- 
mulation of  gold  by  belligerent  governments — 
The  gold  imports  at  New  York  and  their  cause — 
Wheat  crop  of  1914 — Spectacular  movement  of 
foreign  trade — New  York  as  a  world  money  centre 
— ^The  great  revival  of  American  prosperity. 

VIII.    Currency  Inflation      ....     144 

Paper-money  issues  of  England  and  the  Conti- 
nent during  the  present  war — Reasons  for  exces- 
sive issues  in  war  time — ^The  disputed  question  of 
depreciation — ^The  United  States  and  its  new  cur- 
rency— "Federal  Reserve  notes"  and  the  Ameri- 
can money  supply. 

IX.    The  Foreign  Exchanges    .     .     .     163 

Meaning  of  depreciation  in  exchange  rates — ^The 
extraordinary  fall  in  New  York  exchange  on  Eu- 


CONTENTS  xl 


rope — Influence  of  our  export  trade — Of  the  shift- 
ing of  capital  to  America — ^London's  gold  exports 
to  New  York — ^The  $500,000,000  Anglo-French 
loan — British  Government  and  English  investors 
in  American  securities. 

X.    When  the  War  Ends     ....     184 

Futile  suggestions  for  peace  negotiations — Atti- 
tude of  American  markets  toward  the  question — 
Our  financial  interest  in  continuance  of  war  or  re- 
turn of  peace — Political  and  economic  sequel  to 
other  wars — ^The  world  after  other  great  inter- 
national conflicts. 

XI.    The  Economic  Aftermath       .198 

Belligerent  Europe  when  the  war  is  over — Finan- 
cial future  of  France — Of  England — Of  Germany — 
London  and  the  "World  Market" — Relations  of 
the  European  states — ^The  question  of  an  eco- 
nomic war  between  Germany  and  the  Allies. 

XII.    Europe  and  America     .     .     .     .     227 

Uncertainties  as  to  our  own  financial  outlook  on 
return  of  peace — ^The  question  of  "Preparedness" 
— Post-bellum  competition  in  the  world's  trade- 
Industrial  Europe's  predictions — ^Two  sides  to  a 
disputed  question — New  conditions  of  the  eco- 
nomic future  after  this  war. 

Index .     245 


CHAPTER  I 
PRECEDENT  AND  PREDICTION 

BEFORE  the  European  War  broke  out,  the 
most  familiar  answer  of  the  banking  com- 
munity, to  predictions  of  such  a  war,  was 
that  the  economic  consequences  would  be  so 
terrific  as  to  deter  any  statesman  or  ruler  from 
committing  his  country  to  them.  After  the  fight- 
ing had  begim,  prediction  was  quite  as  general 
to  the  effect  that  the  war  must  necessarily  be 
short,  because  none  of  the  belligerents  would  be 
able  to  endure  the  financial  strain.  In  concrete 
terms,  this  forecast  usually  shaped  itself  in  the 
statement  that  economic  exhaustion  could  not 
fail  to  reach,  by  the  end  of  19 15  at  any  rate,  so 
acute  a  stage  as  to  compel  the  ending  of  hostil- 
ities. 

Both  predictions  we  now  know  to  have  been 
entirely  wrong,  and  they  were  not  more  promptly 
and  completely  refuted  by  the  course  of  events 
than  were  the  prophecies  of  specific  phenomena, 
military  or  financial.  These  facts  cannot  well  be 
ignored  in  attempts  to  forecast  the  still  weightier 
problems  which  will  arise  on  return  of  peace. 
Prediction  of  those  later  results,  whether  based  on 


2    PRECEDENT  AND  PREDICTION 

experience  of  history  or  on  particular  circum- 
stances of  the  day,  has  no  greater  presumption  of 
infallibihty  than  the  predictions  of  immediate  re- 
sults in  1 9 14.  Certainly  no  more  baffling  and  be- 
wildering question  has  been  presented  for  a  cen- 
tury past,  in  the  field  of  political  and  economic 
history,  than  the  question  what  is  to  be  the  after- 
math of  the  present  war.  Politically,  problems 
are  involved  of  so  complicated  a  nature  that  the 
forecast  even  of  the  most  experienced  European 
statesman  could  not  be  better  than  a  guess.  As  a 
matter  of  fact,  statesmen  have  risked  no  such  pre- 
dictions, but  have  restricted  themselves  to  general 
expressions  of  their  hope  or  purpose,  such  as  ''the 
insuring  of  permanent  peace  in  Europe"  or  "the 
ending  of  the  burden  of  militarism.'*  As  to  pre- 
cisely what  measures  would  or  could  insure  these 
wished-for  consummations,  on  any  supposition  re- 
garding the  military  outcome  of  the  war,  the  public 
men  were  silent.  The  post-bellum  territorial  read- 
justment, post-bellum  conditions  in  the  internal 
politics  of  the  states  now  indulging  in  so  unparal- 
leled sacrifice  of  blood  and  treasiu-e,  were  sure  to 
be  powerful  factors  in  determining  the  future; 
yet  even  as  to  these,  we  had  only  such  vaguely 
formulated  suggestions  as  the  ''realizing  of  Rus- 
sians aspirations  in  the  Bosporus,"  the  "creation 
of  an  autonomous  Poland,"  or  the  "recovery  by 
France  of  her  lost  provinces." 


THE  FORCES  AT  WORK  3 

As  with  the  political  sequel  to  the  war,  so 
with  its  financial  and  economic  sequel.  In  both 
directions  forces  of  incalculable  magnitude  had 
been  set  loose  in  this  epoch-making  conflict,  and 
their  effect  on  the  political  and  economic  structure 
of  Europe  was  rendered  more  utterly  novel  a 
problem  by  the  extremely  complicated  character 
which  international  relations  of  every  sort  have 
assumed  in  the  past  generation.  When  the  ag- 
gregate daily  military  expenditure  of  the  bellig- 
erent powers  had  become  ten  times  as  great  as  in 
any  previous  war  of  history ;  when  the  European 
states,  already  burdened  with  the  accimiulated 
public  indebtedness  of  the  past  half-century, 
doubled  or  trebled  that  debt  within  two  years; 
when  the  mere  annual  interest  charge  on  the 
new  indebtedness  may  presently  exceed  the  total 
yearly  public  revenue  of  the  several  belligerent 
states  in  the  year  before  the  war,  it  is  scarcely 
surprising  that  the  financial  community  itself 
should  have  listened  to  any  theory  promul- 
gated as  to  conditions  after  the  war.  Even  in 
the  plans  and  discussions  of  practical  business 
men,  this  imknown  future  gradually  assimied  the 
aspect  of  something  terrible  because  it  was  un- 
known. The  formula  of  Preparedness,  which 
very  soon  occupied  a  front  place  in  legislative 
controversy,  with  neutral  states  even  more  than 
with  belligerents,  embodied  the  popular  concep- 


4   PRECEDENT  AND  PREDICTION 

tion,  not  of  conditions  which  must  in  the  nature 
of  things  arise  when  the  war  is  over,  but  of  con- 
ditions which  the  imagination  pictured  as  pos- 
sibilities. Seeing  that  high  experts  either  dis- 
agreed diametrically  in  their  predictions,  or  else 
confessed  their  inability  to  predict  at  all,  it  was 
perfectly  natural  that  imagination  should  have 
drawn  some  startling  pictures,  yet  that  the  pic- 
tures should  have  differed  absolutely  from  one 
another. 

Financial  as  well  as  political  observers  had,  it 
is  true,  the  volimiinous  history  of  the  world's  great 
wars  on  which  to  base  conclusions.  Among  other 
precedents,  the  financial  sequel  to  the  outbreak 
of  our  own  Civil  War  was  not  without  possible 
suggestions.  Delegates  from  the  seceding  States 
had,  on  February  8,  1861,  met  at  Montgomery 
and  formed  the  Southern  Confederacy.  It  was 
not,  however,  until  after  Lincoln's  inauguration 
on  March  4,  when  the  certainty  of  war  began  to 
be  recognized,  that  the  banking  crisis  actually 
developed.  In  April  banks  at  all  the  Northern 
cities  temporarily  deferred  cash  payments;  in 
May  the  Southern  banks  suspended  specie  pay- 
ments altogether,  and  the  new  Confederate  Gov- 
ernment officially  forbade  payment  of  debts  by 
Southern  to  Northern  houses.  The  Northern 
dry-goods  trade  fell  into  panic;  merchants'  paper 
being  discounted  at  the  banks  for  as  high  a  rate 


WHEN  OUR  CIVIL  WAR  BEGAN       S 

as  3  per  cent  a  month.  Yet  the  crisis  seemed  to 
have  been  overcome  until  the  gold  of  the  coimtry 
began  to  be  rapidly  drained  away  on  export  in 
the  autumn.  On  December  17  the  New  York 
banks  concurred  in  a  formal  resolution  that  the 
situation  gave  **no  reason,  justification,  or  neces- 
sity for  a  suspension  of  specie  payments";  but 
less  than  a  fortnight  later  they  took  precisely 
that  action,  and  the  coimtry  was  soon  committed 
to  the  irredeemable  government  paper  currency, 
for  which  redemption  in  coin  was  not  provided 
until  seventeen  years  later,  more  than  thirteen 
years  after  the  ending  of  the  war. 

One  or  two  of  these  incidents  had  a  bearing  on 
the  possible  course  of  economic  events  in  the 
European  War,  and  we  shall  find  some  interesting 
analogy  ia  the  manner  in  which,  contrary  to  all 
prediction  of  financial  markets,  the  enormous 
war  loans  of  our  Civil  War  were  floated.  But 
with  those  points  of  very  general  resemblance,  the 
economic  parallel  ends.  The  war  of  1861  was  a 
purely  domestic  struggle;  the  commerce  of  the 
United  States  was  imimpeded;  we  raised  money 
freely  by  the  sale  of  our  new  securities  to  the 
outside  world.  No  real  analogy  with  the  circtim- 
stances  imder  which  this  present  war  broke  out 
could  in  fact  be  foimd,  short  of  the  Napoleonic 
conflict  of  a  century  ago.  Twelve  nations  were 
simultaneously  at  war  in  181 5;  twelve  were  at 


6    PRECEDENT  AND  PREDICTION 

war  exactly  a  hundred  years  later;  nothing  ap- 
proaching a  contest  with  such  scope  had  occurred 
in  the  intervening  period.  In  none  of  the  wars 
since  Waterloo  had  campaigns  been  simultane- 
ously fought  by  European  colonists  on  other  con- 
tinents, and  in  remote  parts  of  the  world.  In 
none  of  them  had  sea  fights  on  the  coast  of 
South  America  or  Australia  divided  interest  with 
battles  in  the  centre  of  Europe. 

At  the  very  beginning  of  the  present  war  was 
duplicated  that  episode  which  has  so  often  seemed 
incredible,  and  which  even  the  historians  describe 
as  a  "barbarous  decree" — Napoleon's  seizure  and 
imprisonment,  for  a  dozen  years  after  his  dec- 
laration of  war  in  1803,  of  10,000  English  tour- 
ists and  residents  in  France.  The  struggle  of 
the  small  neutral  states  of  Europe,  after  1805, 
between  the  upper  and  nether  millstone  of  the 
powerful  belligerents  reads  like  a  chapter  from 
last  year's  history  of  southeastern  Europe.  Nel- 
son's bombardment  of  Copenhagen  and  its  fleet 
in  1809,  at  an  hour  when  Denmark  was  not  at 
war  with  either  side,  but  merely  balancing  be- 
tween alliance  with  the  English  or  the  French, 
can  nowadays  be  better  understood  by  those  who 
have  watched  the  recent  predicament  of  Greece. 

For  a  hundred  years,  readers  of  history  have 
looked  back  with  astonishment  to  the  10  per  cent 
tax  levied  on  English  incomes  at  the  opening  of 


ANALOGIES  OF  HISTORY  7 

the  nineteenth  century.  To-day  incomes  of  Eng- 
lish citizens  pay  25  per  cent  and  upward  to  the 
government.  *' Pitt's  subsidies"  have  reappeared 
on  an  immensely  expanded  scale  in  the  $1,500,- 
000,000  advanced  for  war  purposes  by  England 
to  her  allies  in  a  single  twelvemonth.  Since 
July,  1 9 14,  the  world  has  again,  for  the  first  time 
in  more  than  a  hundred  years,  seen  captured 
cities  in  the  heart  of  Europe  deliberately  given 
to  the  flames,  citizens  held  for  hostage,  tribute 
imposed  on  non-resisting  towns  occupied  by  the 
enemy — occurrences  which  were  supposed,  with 
the  civilized  world's  formal  adoption  of  a  hu- 
mane code  of  international  relations,  to  have 
been  relegated  to  the  limbo  of  other  centuries. 
Even  the  chapter  in  the  story  of  Napoleonic  Paris 
at  which  later  generations  have  smiled — the  hys- 
terical outcry  over  the  "English  lies"  to  which 
was  ascribed  unpleasant  news  about  the  war — 
has  been  reproduced  to  an  admiring  world  by 
twentieth-century  Berlin. 

In  no  respect  was  the  parallel  more  startling 
than  in  the  great  collision  over  the  rights  of  neu- 
tral ships,  which  repeated,  step  by  step,  the 
story  of  the  ** Orders  in  Council,"  the  "Berlin 
Decree,"  and  the  "paper  blockades"  of  the  Napo- 
leonic conflict.  During  the  whole  of  191 5  the 
greatest  of  the  neutral  Powers  lived  over  again, 
with  remorseless  coincidence  of  causes  and  yet 


8   PRECEDENT  AND  PREDICTION 

with  the  most  impressive  contrast  of  circum- 
stance, the  long  series  of  episodes  which  led  up 
to  our  War  of  1812;  the  historical  parallel  lying 
not  only  in  the  fact  of  two  European  antagonists, 
in  the  earlier  period,  interfering  with  our  com- 
merce in  order  to  injure  one  another,  but  in  the 
further  fact  that  both  of  them  on  that  occasion, 
like  one  of  them  in  the  present  instance,  con- 
ditioned their  own  suspension  of  unlawful  attacks 
upon  our  vessels  on  our  government's  inducing 
the  other  belligerent  to  stop  blockading  its  Eu- 
ropean enemy — a  proposal  of  which  President 
Madison,  anticipating  President  Wilson's  atti- 
tude, bitterly  remarked  to  Congress  that  it  was 
tantamount  to  ''asserting  an  obligation  on  a  neu- 
tral Power  to  reqtiire  one  belligerent  to  encourage 
by  its  internal  regulations  the  trade  of  another 
belligerent."  With  political,  military,  and  finan- 
cial events  repeating  with  such  dramatic  accuracy 
the  story  of  the  Napoleonic  wars,  it  might  surely 
have  been  asstmied  that  even  the  economic  his- 
tory of  the  present  war,  during  the  period  of  hos- 
tilities and  afterward,  might  have  been  foretold 
from  the  records  of  a  century  ago. 

One  reason,  recognized  from  the  very  start, 
why  this  process  of  analogy  was  bound  to  fail,  lay 
in  the  prodigious  cost  of  war  to-day.  .As  to  what 
that  cost  would  be,  political  statisticians  and 
military  experts  had  for  years  been  busy  estimat- 


THE  COST  OF  MODERN  WAR        9 

ing.  Our  own  War  of  Secession  cost  the  United 
States  Government  $1,000,000  per  day  in  its 
early  stages  and  $3,000,000  daily  during  and  after 
1863.  An  official  French  report  of  January,  187 1, 
reckoned  the  current  daily  expenditure  of  France 
for  the  war  with  Prussia  at  $3,200,000.  The  little 
Transvaal  War,  lasting  from  October,  1899,  to 
June,  1902,  cost  England  $1,085,000,000,  or  a 
million  dollars  a  day.  Japan  and  Russia  spent 
between  them  $3,500,000  daily  on  the  Manchurian 
War  of  1904.  When  the  question  of  a  possible 
*' general  war"  came  into  anxious  controversy  in 
the  last-named  year,  a  well-known  French  stat- 
istician, M.  Jules  Roche,  calculated  that  in  a 
conflict  involving  two  or  three  great  Powers  the 
average  daily  cost  for  all  combined  wotild  be 
about  $6,000,000,  but  that  a  war  in  which  France, 
Russia,  Germany,  and  Austria  were  all  engaged 
would  cause  a  total  average  expenditure,  for 
purely  military  purposes,  of  $18,000,000  per  day. 
The  somewhat  earHer  estimate  of  an  Austrian 
economist  had  figured  that  participation  in  a 
European  war  would  cost  France  $5,100,000  per 
day,  Russia  $5,600,000,  Germany  $5,000,000,  and 
Austria  $2,600,000.  In  19 13,  when  the  Balkan 
War  once  more  revived  speculation  as  to  the  pos- 
sibilities of  a  general  conflict,  Doctor  Charles 
Richet,  of  the  University  of  Paris,  on  the  basis  of 
a  very  elaborate  calculation,  estimated  that  if 


lo      PRECEDENT  AND  PREDICTION 

Germany,  England,  France,  Russia,  Italy,  Aus- 
tria, and  Rumania  were  all  to  engage  in  war,  the 
actual  average  expense  of  the  campaign  per  day 
would  be  $54,100,000.  This  estimate,  it  will  be 
observed,  came  very  close  to  naming  the  actual 
belligerents  of  19 14.  Even  when  republished  at 
the  outbreak  of  the  present  war,  the  figure  was 
commonly  regarded  as  incredible.  Yet  exactly  a 
year  after  hostilities  had  begun,  the  German  im- 
perial chancellor  told  the  Reichstag  that  the  daily 
cost,  to  all  the  Powers  involved,  was  $75,000,000. 
The  daily  expenditure  of  England  and  Germany 
alone  in  the  middle  of  the  present  year  was  greater 
than  Doctor  Richet's  estimated  outlay  for  all  seven 
belligerent  Powers,  and  the  estimate  of  inter- 
national bankers  in  Jtme,  1916,  as  to  the  total 
daily  outlay  by  all  the  European  belligerents  com- 
bined, was  $103,000,000. 

Now,  the  average  daily  cost  to  England  of  the 
entire  Napoleonic  War  was  less  than  $2,000,000, 
as  against  the  $25,000,000  average  which  it  has 
reached  this  present  year.  It  is  true  that  the 
national  wealth  has  increased  at  an  almost  equal 
rate.  But,  on  the  other  hand,  when  Pitt  placed 
his  10  per  cent  tax  on  English  incomes  in  that 
earlier  period  there  had  been  no  income  tax  at  all 
in  England,  whereas  English  incomes,  early  in 
1 9 14,  were  already  paying  what  was  traditionally 
called  a  "war  rate"  of  taxation.    The  cost  of  war 


IN  THE  DAYS  OF  NAPOLEON         ii 

to  Napoleon  was  trifling  compared  with  the  ex- 
penditure of  continental  belligerents  to-day.  It 
was  possible  for  him  to  tell  the  Directory  at  Paris 
that  the  $4,000,000  "contribution"  imposed  on 
Lombardy  in  his  Italian  campaign,  and  the  $2,- 
400,000  exacted  from  Parma  and  Modena,  had 
paid  the  cost  of  war.  The  $8,000,000  indemnity 
exacted  from  Vienna  after  Austerlitz  came  very 
near  to  serving  a  similar  purpose  in  the  campaign 
of  1805.  The  imitation  of  this  procedure  by  the 
German  generals,  in  their  Belgian  campaign  of 
1 9 14,  was  not  even  mentioned  at  Berlin  as  a  help 
toward  paying  war  expenses.  It  had  no  effect 
whatever,  except  to  expose  the  authors  of  the 
cruel  exaction  to  the  scorn  and  contempt  of  the 
outside  world. 

But  the  vastly  larger  cost  of  present-day  war- 
fare was  not  the  only  consideration  which  pre- 
vented drawing  of  confident  analogies  from  the 
economic  results  of  war  a  century  ago.  When  the 
treaty  of  Amiens  between  France  and  England 
was  broken  in  1803,  international  finance  and  in- 
ternational foreign  trade  were  in  their  infancy. 
Judged  by  its  scope  and  methods  of  to-day,  for- 
eign commerce  was  conducted  in  a  fashion  which 
may  fairly  be  described  as  primitive.  Interr 
national  banking  and  investment  were  hardly  in 
their  beginning;  the  house  of  Rothschild,  for  ex- 
ample, dates  its  origin  from  the  days  of  disordered 


12   PRECEDENT  AND  PREDICTION 

continental  finance  and  great  English  public  loans 
which  came  with  the  Napoleonic  wars.  No  bel- 
ligerent state,  therefore,  was  confronted  with 
enormous  sales,  on  its  stock  exchanges,  of  secur- 
ities held  in  the  enemy  markets.  As  a  matter  of 
fact,  the  London  Stock  Exchange  remained  open 
during  the  whole  of  the  Napoleonic  wars;  not  even 
such  precaution  as  arbitrary  "minimum  prices'* 
was  imposed  by  government.  The  price  of  Great 
Britain's  3  per  cent  consols  did  indeed  decline 
from  80  or  90  to  the  neighborhood  of  50;  but  it 
was  lowest  at  the  beginning  of  the  war.  There- 
after, notwithstanding  the  then  unprecedented 
output  of  new  government  securities  by  England, 
the  price  of  consols  rose  and  fell  purely  in  response 
to  news  from  the  campaign;  in  general,  the  price 
was  considerably  higher  than  at  the  beginning  of 
hostilities. 

Government  bonds  were  indeed  almost  the  only 
quarter  in  which  the  rapidly  accruing  capital  of 
Europe  could  be  invested;  at  London,  the  only 
alternatives  of  real  importance  were  the  very 
limited  field  provided  by  shares  of  the  Bank  of 
England  and  the  East  India  Company,  and  the 
very  speculative  and  precarious  field  provided  by 
joint-stock  ventures  in  merchant  ships  and  car- 
goes. The  extremely  intricate  problem,  created 
in  1 9 14  by  the  enormous  mass  which  every  strong 
belligerent  country  held  of  securities  and  floating 


OLD-TIME  WAR  EXPERIENCES      13 

loans  of  foreign,  including  enemy,  communities, 
did  not  therefore  exist  at  all.  But,  on  the  other 
hand,  the  strain  on  the  gold  reserves  of  the  fight- 
ing nations  was  most  formidable.  At  London  al- 
most the  first  financial  event  in  the  long  French 
war  of  a  century  ago  was  suspension  of  gold  pay- 
ment on  its  circulating  notes  by  the  Bank  of 
England.  An  open  premium  of  20  to  40  per  cent 
on  gold  was  the  necessary  consequence;  then  a 
discoimt  of  16  per  cent  or  more  on  English  drafts 
presented  in  the  foreign  exchange  markets  of  such 
great  commercial  cities  as  Amsterdam  and  Ham- 
burg. 

Merchant  vessels  sailing  for  other  destinations 
than  these  banking  centres  carried  gold  and  silver 
in  their  strong  boxes,  and,  though  they  commonly 
moved  in  convoy,  escorted  by  ships  of  war,  they 
were  the  rich  prizes  of  the  maritime  campaign. 
An  extensive  smugglers*  trade,  with  headquarters 
in  the  Channel  Islands,  largely  defeated  the  block- 
ade of  France  and  its  possessions  by  the  British 
fleet.  One  of  the  incidents  of  that  war  was  the 
establishment,  from  the  imguarded  seaports  in 
Finland  or  Dalmatia,  of  a  land  route  through 
which,  in  wagons  or  sledges  drawn  by  relays  of 
horses,  contraband  merchandise  was  carried  from 
England  across  the  Continent  to  Germany  and 
France — at  a  cost  said  to  have  been  fifty  times  the 
freight  rate,  then  existing,  from  London  to  Cal- 


-f- 


14   PRECEDENT  AND  PREDICTION 

cutta.  In  short,  the  confusion  into  which  the 
present  war  plunged  international  finance,  di- 
rected itself  a  century  ago  to  ocean  trade.  Such 
international  banking  problems  as  existed  were 
created  wholly  by  this  exchange  of  merchandise. 
j(  When  the  British  Government,  during  the  Na- 
poleonic wars,  paid  its  famous  subsidies  to  the 
German  states,  the  most  efficient  means  of  doing  it 
was  found  to  be  through  a  three-cornered  opera- 
tion, based  on  the  foreign  trade  of  the  United 
States.  With  neither  of  the  great  belligerents  in 
control  of  the  sea,  and  with  French  and  English 
frigates  cruising  along  the  ocean  routes  to  cap- 
ture enemy  merchant  ships,  the  merchants  of 
neutral  America,  whose  export  trade  in  products 
of  the  United  States  was  small,  developed  a 
lucrative  business  in  carrying  West  Indian  prod- 
ucts to  England  and  continental  Europe  and 
bringing  back  English  manufactures  for  home 
consimiption.  On  the  English  markets,  these 
merchants  bought  far  more  than  they  sold;  on 
the  Continent  they  sold  far  more  than  they 
bought.  The  British  Government  therefore 
bought  from  the  London  merchants  their  claims 
on  American  importers  and  sent  them  to  the 
German  money  markets,  where  the  American 
traders*  claims  on  German  merchants  were  ac- 
cepted in  payment;  such  mercantile  drafts  on 
Germany  being  then  used  for  payment  of  the 


WHAT  WAS  EXPECTED  IN  1914      15 

British  exchequer's  subsidies  to  the  German 
princes. 

It  was  not  difficult  to  see,  even  in  August,  19 14, 
how  Httle  of  sure  analogy  as  to  probable  economic 
results  in  the  new  European  War  could  be  based 
on  these  experiences  of  the  last  great  conflict  of  a 
similar  scope.  The  immense  expansion  of  inter- 
national trade  and  banking  which  had  marked 
the  century  since  the  battle  of  Waterloo;  the 
complete  change  which  had  occiu-red  in  the  in- 
vestment of  capital;  the  enormously  complicated 
machinery  of  debits  and  credits,  assets  and  lia- 
bilities, as  between  all  of  the  great  financial  mar- 
kets— these  were  aspects  of  the  situation  such  as 
could  only  confuse  and  bewilder  the  financial 
mind.  It  was  perfectly  evident  when  this  war 
began  that,  whatever  were  to  be  the  actual  eco- 
nomic phenomena  created  by  it,  they  would  not 
be  the  comparatively  simple  problems  of  1793 
and  1803  and  18 12,  but  something  vastly  more 
difficult  for  the  financial  markets  to  surmoimt 
without  world-wide  collapse  of  credit. 

Since,  then,  we  have  seen  how  little  light  history 
could  throw  on  the  probable  economic  events  of 
the  war  of  19 14,  it  will  be  interesting  to  inquire 
what  experienced  financiers  expected  to  occtir 
as  an  immediate  consequence  of  its  outbreak. 
Minds  of  the  greatest  bankers,  in  every  market  of 
the  world,  had  been  absorbed  in  this  question  for 


i6   PRECEDENT  AND  PREDICTION 

a  generation.  Despite  their  incredulity  as  to  the 
willingness  of  any  government  to  provoke  such  a 
war,  the  possibility  was  never  absent  from  their 
calculations.  The  largest  financial  interests  in 
the  world  were  at  stake  in  their  judgment  as  to 
the  immediate  economic  sequel. 

The  question,  what  results  they  actually  looked 
for,  is  not  at  all  difficult  to  answer.  [Jt  was  well 
tmderstood  beforehand  that,  in  the  economic  as 
well  as  in  the  military  field,  forces  would  be  called 
into  play  such  as  woidd  test  with  the  utmost 
severity  the  financial  endurance  of  the  belligerent 
commtmities.  But,  as  regards  specific  results,  the 
coiu-se  of  events  in  the  world's  economic  history 
since  the  war  began,  as  in  the  strategy  of  the  war 
itself,  has  been  a  chapter  of  surprises.  With  a 
single  exception — the  French  calculation,  already 
referred  to,  that  a  war  involving  six  European 
Powers  would  cost  at  least  $50,000,000  per  day, 
which  has  been  more  than  realized — every  predic- 
tion of  the  immediate  financial  and  economic  se- 
quel hit  wide  of  the  mark, 
y  First,  general  insolvency  would  be  inevitable, 
with  bankruptcy  of  the  most  important  inter- 
national houses — owing  to  the  sudden  embargo  on 
collection  of  the  enormous  mass  of  credits  out- 
standing to  their  account  in  other  countries.  That 
prophecy  has  not  been  fulfilled  at  all;  there  have 
been  fewer  of  such  bankruptcies,  either  in  bellig- 


SIR  EDWARD  GREY'S  PROPHECY   17 

erent  or  neutral  states,  than  in  an  ordinary  "panic 
year"  like  1866  or  1873.  Second,  outbreak  of  /^ 
general  European  war  would  break  down  inter- 
national trade  completely;  partly  because  of  the 
crumbling  away  of  credit,  partly  because  of  hos- 
tile navies  on  the  sea.  As  late  as  July  23,  1914, 
only  a  week  before  the  German  ultimatums,  Sir 
Edward  Grey  predicted  to  the  British  ambassador 
at  Vienna  that  **if  four  great  Powers — ^say  Aus- 
tria, Russia,  France,  and  Germany — engaged  in 
war,  the  war  would  be  accompanied  or  followed 
by  a  complete  collapse  in  European  trade  and  in- 
dustry." All  of  the  designated  great  Powers,  and 
with  them  England  and  Italy,  have  been  for  two 
years  at  war;  yet,  except  for  the  foreign  com- 
merce of  Germany  and  Austria,  the  prediction  is 
imfuliilled.  The  problem  of  the  commercial  world 
to-day  is  a  problem,  not  of  available  supply  and 
demand  for  merchandise  in  foreign  trade,  but  of 
available  ships  to  carry  it. 

Third,  liquidation  of  Europe's  investments  in 
neutral  countries,  with  a  view  to  raising  money 
for  the  war  loans,  would  proceed  on  such  a  scale  as 
to  force  a  20  or  30  per  cent  break  in  the  price  even 
of  American  securities  (of  which  the  outside  world 
held  something  like  $4,000,000,000),  with  all  the 
financial  consequences  which  such  sudden  change 
in  basic  values  would  involve.  With  the  un- 
precedented war-time  output  of  new  government 


1 8   PRECEDENT  AND  PREDICTION 

securities  in  Europe,  demand  on  the  whole  worid^s 
investment  capital  would  so  immensely  exceed 
available  supply  as  to  make  this  decline  in  exist- 
ing securities  progressive,  even  in  the  markets  of 
neutral  states.  The  prediction  has  wholly  missed 
fulfilment.  Belligerent  Europe  has  in  actual  fact 
sold  back  to  the  United  States  during  the  progress 
of  the  war  more  than  $1,500,000,000  of  American 
securities;  yet  prices  for  American  stocks  and 
bonds,  after  eighteen  months  of  fighting,  were 
higher  than  when  the  war  broke  out,  and,  instead 
of  the  predicted  panicky  break  on  the  stock  ex- 
changes, the  second  year  of  the  European  War 
was  distinguished  on  the  American  markets  by 
an  exceedingly  violent  speculation  for  the  rise. 

Finally — and  this  belief  persisted  during  sev- 
eral months  of  the  war  itself — ^the  wholesale  re- 
call of  belligerent  Europe's  capital  from  neutral 
markets,  and  especially  the  throwing  back  upon 
them  of  the  securities  previously  sold  by  them  to 
Europe,  would  result  in  drawing  all  the  gold  of 
neutral  states  into  the  European  banks,  with  re- 
sultant collapse  of  bank  reserves  in  such  neutral 
markets,  complete  upsetting  of  their  credit,  and 
extreme  advances  in  their  money  rates.  None  of 
the  prophecies  has  been  so  amazingly  falsified  as 
this.  Not  only  was  the  American  market's  im- 
portation of  gold,  in  191 5,  larger  by  $300,000,000 
than  in  any  previous  year  of  its  history,  with 


UNLOOKED-FOR  RESULTS  19 

the  inflow  continuing  during  191 6,  but  the  accu-  k/ 
mulation  of  gold  in  such  other  neutral  states 
as  Holland  and  Sweden  was  so  abnormally  rapid 
that,  reversing  all  previous  financial  practice, 
measures  were  actually  taken  by  the  banks  of 
those  two  coimtries  to  discourage  further  imports, 
lest  the  mere  fact  of  overflowing  bank  reserves 
should  provoke  imwholesome  speculation.  Re- 
serves of  the  American  banks  passed  far  beyond 
their  previous  maximum.  As  for  the  money 
market,  New  York  was  destined  to  be  confronted, 
after  19 14,  with  one  of  the  longest  consecutive 
periods  of  extremely  low  money  rates  in  its  his- 

Such  was  the  series  of  erroneous  and  misleading 
expectations  with  which  the  whole  financial  com- 
mimity  of  the  world,  and  especially  that  of  Eng- 
land, entered  the  period  of  war.  It  will  now  be 
our  task  to  survey  the  actual  course  of  economic 
events;  to  inquire  why  results  imexpected  by  the 
most  competent  financiers  actually  came  to  pass 
and  why  the  expected  results  did  not,  and  then  to 
see  how  far,  on  the  basis  either  of  past  or  present 
experience,  we  can  map  out  the  horoscope  for  the 
aftermath  of  war. 


CHAPTER  II 
THE  WAR  PANIC 

WITH  what  spectacular  suddenness  the 
great  European  War,  for  whose  possible 
occurrence  financial  Europe  had  during 
forty  years  been  watching  apprehensively,  at  last 
broke  out  at  the  end  of  July,  19 14,  no  one  who 
lived  through  that  period  is  likely  to  forget. 
The  sense  of  incredulity;  the  insistence  that  such 
a  thing  was  not  possible  in  our  time;  the  final  be- 
wildering whirl  of  events,  remembered  by  most 
people  only  as  a  cloud  of  confusion  until  the  Ger- 
man advance  on  Paris,  with  the  French  and  Eng- 
lish armies  retreating  before  the  triumphant 
invader,  emerged  as  a  concrete  fact — ^what  all 
this  signified  in  America  it  signified  in  Europe 
also,  and  in  the  great  financial  markets  of  Europe 
as  well  as  among  the  people  at  large. 

Except  for  a  general  sense  that  events  crowded 
on  one  another's  heels  with  such  rapidity  that  the 
latest  bulletin  of  the  newspaper  ** extra"  went  far 
toward  blotting  out  recollection  of  what  had  gone 
before,  few  people  even  to-day  remember  what 
actually  happened  in  that  period  of  confusion. 
This  was,  and  is,  as  true  of  the  financial  com- 


ON  THE  EVE  OF  WAR  21 

munity  as  of  the  community  at  large.  Austria's 
ultimatum  to  Servia  created,  in  the  hasty  view 
of  the  reader  of  the  despatches,  the  sense  that  a 
crisis  had  arisen  which,  because  of  its  very  gravity, 
must  somehow  be  surmounted.  In  another  week 
both  Austria  and  Servia  were  lost  to  sight  in  the 
rush  of  larger  consequences  elsewhere  on  the  map 
of  Europe.  For  a  single  day  the  firing  by  the 
troops  on  the  Dublin  rioters  seemed  to  be  the 
event  of  paramount  significance;  then  it  was  for- 
gotten for  a  year.  The  predicament  of  American 
tourists,  imable  to  get  away  from  the  area  of 
fighting,  held  the  centre  of  the  news  for  a  period 
only  a  little  longer.  How  slowly  the  compre- 
hension of  what  was  actually  happening  swept 
over  even  the  financial  mind  may  be  forcibly  re- 
called by  the  episode  of  the  North  German  Lloyd  CD 
steamer  Kronprinzessin  Cecilie,  whose  departure 
from  New  York  for  a  German  port  on  Tuesday, 
July  28,  with  $10,000,000  gold  on  board,  con- 
signed one-half  to  London  and  one-half  to  Paris, 
was  discussed  on  Wall  Street  with  more  amuse-, 
ment  than  concern,  as  proving  the  imreality  of 
the  talk  of  war,  imtil  the  news  arrived  of  her  sud- 
den turning  back  in  mid-ocean  and  of  her  race  to 
reach  an  American  port  before  the  English  cruis- 
ers should  intercept  her. 

The  French  invasion  of  Lorraine;   th^^declara- 
tion  of  war  by  England,  at  which,  somehow,  no- 


22  THE  WAR  PANIC 

body  seemed  to  be  surprised;  the  expectant  wait- 
ing for  an  Anglo-German  sea  fight;  the  general 
confidence  in  the  Belgian  army's  resistance;  the 
vague  expectation  of  another  epoch-making  battle 
on  the  historic  field  of  Waterloo ;  the  early  details 
of  the  German  army's  outrages;  the  fall  of  Na- 
mur  and  Brussels  and  the  swift  forward  move- 
ment of  Von  Kluck — ^no  such  bewildering  pano- 
rama had  been  presented  to  the  eyes  and  mind 
of  this  generation.  Only  when  the  American 
community  awoke  to  its  full  discovery  of  the 
powerful  and  unanimous  sentiment  of  abhorrence 
at  the  German  Government's  performances — a 
sentiment  destined  to  grow  vastly  stronger  as  the 
war  progressed — did  our  own  people  begin  to  see 
the  chapter  of  events  in  its  true  relations.  To  the 
great  financial  markets,  usually  the  keenest  and 
most  accurate  judges  of  the  meaning  of  events, 
this  awakening  to  the  facts  of  the  situation 
brought,  first,  a  practically  unanimous  conviction 
that,  with  England  ranged  on  the  side  of  France 
and  Russia,  Germany's  ultimate  defeat  was  cer- 
tain, and  that  therefore  every  German  victory 
must  be  considered  a  calamity,  not  only  because 
of  the  methods  and  practises  which  it  might 
seem  to  vindicate,  it  meant  prolongation  of  the 
war.  But  even  before  arriving  at  this  positive 
conclusion  (from  which  Wall  Street  has  not  turned 
at  any  subsequent  moment  of  the  war)  the  finan- 


CAUSES  FOR  THE  CRISIS  23 

cial  markets  had  to  pass  through  what  was  tin- 
questionably  the  most  formidable  panic  of  history. 

Financial  panic,  as  defined  by  all  previous  ex- 
perience, arises  from  one  or  more  of  four  main 
causes — doubt  over  the  solvency  of  great  fidu- 
ciary institutions;  sudden  withdrawal  of  the 
credit  on  which  business  men  were  relying  for 
their  ordinary  engagements;  acute  apprehension 
of  a  collapse  in  value  of  investments;  or  complete 
loss  of  confidence  in  the  currency.  The  first,  if 
not  immediately  checked,  leads  to  runs  of  de- 
positors on  banks,  to  a  frantic  call  by  creditors 
on  debtors,  and  to  stopping  of  payments;  the 
second  to  a  desperate  struggle  of  merchants  and 
bankers  to  realize  on  their  assets;  the  third  to 
wholesale  cancellation  of  loans  based  on  stock 
exchange  securities;  the  foiurth  to  such  hoarding 
of  gold  as  causes  the  actual  circulating  money  of 
a  whole  community  to  disappear.  As  we  shall 
see,  and  as  was  quite  inevitable  from  the  nature 
of  the  crisis  of  1914,  all  four  causes  operated  in- 
stantly and  on  a  scale  never  previously  witnessed 
in  financial  history. 

The  great  panics  of  the  past  have  been  violent 
in  their  immediate  phenomena,  in  proportion  as 
the  shock  caught  financial  markets  off  their  guard 
and  without  a  chance  to  adopt  precautionary 
measures.  They  have  been  destructive  in  their 
economic  results,  in  proportion  as  it  was  difficult 


)< 


24  THE  WAR  PANIC 

to  remove  the  real  cause  of  alarm,  or  to  obtain 
for  one  hard-pressed  community  the  help  of  others 
which  had  escaped  the  panic.  The  panic  of 
August,  1 9 14,  arose  from  the  European  War  it- 
self, whose  formidable  consequences  were  only 
beginning.  Every  market  in  the  world  fell  under 
its  immediate  influence;  instead  of  financial  relief 
obtained  from  foreign  countries  each  panic- 
stricken  commimity  was  confronted  by  the  most 
urgent  measures  elsewhere  to  prevent  such  re- 
course. Above  all,  the  shock  of  war  and  war 
panic  came  on  an  almost  completely  unprepared 
and  unsuspecting  business  world. 

That  no  such  news  as  that  of  July  31  could 
possibly  have  been  anticipated  by  the  German, 
French,  or  English  financiers,  the  $10,000,000  gold 
shipment  of  the  28th  was  striking  proof.  But 
there  is  other  evidence  to  the  same  effect.  What 
purposes  were  secretly  entertained  by  the  Austrian 
cabinet  and  the  German  general  staff,  during  the 
two  or  three  weeks  (and  possibly  the  two  or 
three  years)  before  the  declaration  of  war,  will 
probably  remain  a  matter  of  dispute  when  the  in- 
side history  of  this  war  is  being  written  half  a 
century  hence.  The  diplomatic  communications 
published  by  some  of  the  belligerent  countries,  the 
obvious  suppression  of  diplomatic  documents  by 
others,  and  the  later  disclosures  by  Italian  states- 
men of  the  diplomatic  suggestions  of  1913,  car- 


ATTITUDE  OF  THE  MARKETS      25 

tainly  threw  sinister  light  on  the  attitude  of  the 
two  central  European  Powers.  But  these  were 
considerably  later  revelations.  In  August,  19 14, 
the  shock  came  upon  the  world's  great  financial 
markets  with  as  complete  a  violence  and  sudden- 
ness as  it  is  possible,  in  an  event  of  such  im- 
mense importance,  to  imagine.  This  fact  had 
very  much  to  do  with  the  character  of  financial 
events  at  the  beginning  of  the  war.  Financial 
markets  have  had  a  long  experience  in  preparing 
for  the  most  formidable  contingencies,  provided 
they  only  have  had  reasonable  notice.  But  it  is 
probable  that  no  other  war  in  modem  times— 
with  the  possible  exception  of  the  Franco-Prussian 
War  of  1870,  the  circumstances  of  whose  begin^ 
ning  were  somewhat  like  those  of  19 14 — ^has  taken 
the  great  financial  communities  of  the  world  so 
absolutely  off  their  guard. 

Yet  the  very  recent  history  of  the  markets 
gave  a  curious  aspect  to  the  complete  surprise 
with  which  the  outbreak  of  this  war  caught  finan- 
cial Europe.  The  stock  exchanges  had  at  inter-  ^ 
vals  been  discussing,  during  at  least  four  decades, 
a  "general  European  war"  as  a  possible  factor  in 
financial  calculations.  The  discussion  had  for 
the  most  part  been  vague  and  academic;  but  in 
the  two  or  three  years  before  1914  the  apprehen- 
sion had  begun  to  take  something  like  concrete 
form.     This  phase  of  the  matter  began  in  June, 


26  THE  WAR  PANIC 

191 1,  when  Germany,  with  the  evident  enough 
purpose  of  provoking  trouble,  sent  a  gunboat  to 
Morocco,  where  France  was  engaged  in  protecting 
the  concessions  allowed  to  her  by  the  Algeciras 
conference  of  the  Powers;  that  action  being  ac- 
companied by  a  menacing  attitude  at  Berlin, 
and  followed  by  Sir  Edward  Grey's  declaration  to 
the  German  ambassador,  on  July  21  of  the  same 
year,  that,  if  the  negotiations  between  Germany 
and  France  should  fail,  "Great  Britain  would  be 
obliged  to  take  some  step  to  protect  British  in- 
terests." 

This  was  a  veiled  threat  of  war — ^by  Germany 
on  France,  by  England  on  Germany.  Paris 
bankers  had  been  lending  money  heavily  in  Ger- 
many; the  estimates  ran  to  the  hundreds  of 
millions  of  francs.  They  began  that  autumn  to 
recall  those  loans,  with  severe  money  stringency 
in  Germany  as  a  result.  Simultaneously,  the  com- 
mon people  of  France  began  to  hoard  gold  in 
their  old  stockings  and  chimney-pieces ;  a  historic 
evidence  of  their  belief  that  war  might  be  inevi- 
table. The  "Morocco  scare"  passed  over,  but 
in  the  autumn  of  191 2,  when  the  Balkan  War 
began,  distinct  signs  of  financial  apprehension 
were  renewed.  European  statisticians  estimated 
that  not  less  than  $350,000,000  gold  was  hidden 
away  by  the  people  of  Germany,  France,  and 
Austria,  even  before  19 14. 


PREMONITIONS  27 

TPuring  the  whole  of  19 13  money  rates  were 
abnormally  high,  both  on  the  Continent  and  at 
London — largely  as  a  result  of  this  drawing 
away  of  gold  from  bank  reserves.  But  it  was 
evident,  especially  in  London,  that  capital  also 
was  being  hoarded.  The  large  bankers  and  in- 
vestors showed  unmistakable  preference  to  keep 
their  accruing  resources  and  savings  on  deposit  or 
within  easy  reach,  instead  of  investing  them  on 
the  former  scale  in  stocks  or  bonds  of  foreign  com- 
mimities,  which  could  not  be  turned  into  cash  so 
readily.  It  happened  repeatedly,  during  19 13, 
that  new  issues  of  foreign  public  securities  of  the 
highest  grade,  offered  by  Lombard  Street  bankers 
to  investors  at  imusually  low  prices,  were  simply 
not  taken  at  all  by  the  public,  but  left  on  the 
bankers'  hands.  This  phenomenon,  which  was 
ascribed  at  the  time  to  the  **  world's  scarcity  of 
capital,"  is  better  understood  to-day  than  it  was 
then.  The  truth,  as  the  next  two  years  proved 
immistakably,  is  that  the  world's  free  capital 
available  for  investment  was  as  abundant  as  it 
had  ever  been  before,  but  that  its  owners,  in  the 
prevalent  atmosphere  of  vague  political  appre- 
hension, chose  to  keep  it  iminvested  imtil  the 
political  horizon  cleared. 

All  this  might  seem  to  mean  that  financial 
Europe  was  looking  for  this  war  two  or  three 
years  before  it  came.    Yet  it  is  equally  easy  to 


/ 


28  THE  WAR  PANIC 

show  that,  when  the  war  actually  broke  out,  every 
European  market  (possibly  with  the  exception  of 
Vienna  and  Berlin)  was  taken  completely  by  sur- 
prise as  it  is  to  prove  that  the  people  at  large 
did  not  expect  it.  When  war  is  expected  rates 
for  money  always  rise.  But  in  January,  19 14, 
money  rates  were  reduced  at  the  great  state  banks 
of  England,  Germany,  France,  Austria,  Belgium, 
Denmark,  Sweden,  and  Switzerland  to  the  lowest 
figiu-es  touched  since  the  Balkan  War  began  in 
October,  191 2.  The  movement  was  most  unusual 
for  its  emphatic  unanimity. 

This  was  not  all.  An  even  more  infallible  sign 
of  a  financial  market's  belief  in  coming  war  is 
heavy  selling  of  outstanding  government  bonds 
and  a  rapid  fall  in  their  price.  The  reason  is  / 
obvious;  all  experience  teaches  that  the  enor- 
mous borrowings  of  a  government  at  war  will 
flood  the  market  with  new  public  loans  and  beat 
down  the  price  of  older  issues.  Yet  during  those 
opening  weeks  of  19 14,  prices  for  the  government 
bonds  of  Germany,  France,  England,  and  Russia 
advanced  2  to  6  per  cent,  German  and  English 
markets  leading  in  the  movement,  and  the  buying 
demand  for  all  such  securities  being  extremely 
active.  This  extraordinary  incident  on  the  mar- 
kets occurred  only  six  months  before  Germany 
declared  war.  It  is  an  equally  striking  fact  that 
as  late  as  the  middle  of  July — two  weeks  before  the 


AUSTRIA'S  ACTION  29 

ultimatum  to  Russia  and  two  weeks  after  the 
murder  of  the  Austrian  archduke — money  rates 
were  reported  as  growing  still  easier,  both  in  Paris 
and  London.  The  Austrian  stock  market,  it  is 
true,  had  fallen  into  a  panicky  condition;  but 
even  at  Berlin  the  weekly  report  of  a  financial 
journal,  as  late  as  July  9,  made  the  interesting 
comment  that  "as  usual,  the  Norway  voyage  of 
the  Kaiser  marks  the  beginning  of  the  dead  sea- 
son in  German  politics." 

When  Austria,  on  Thursday,  July  23,  sent  her 
note  to  Servia,  making  acceptance  within  forty- 
eight  hours  of  every  one  of  a  series  of  insolent 
demands,  an  ultimattim,  prices  on  the  Vienna 
stock  exchange,  already  very  low,  declined  with 
something  like  panicky  violence.  This  of  itself 
was  not  taken  as  of  great  significance;  because, 
whatever  might  be  the  possibility  of  larger  com- 
plications, Austria  was  evidently  about  to  make 
war  on  Servia  and  was  threatened  with  war  by 
Russia,  and  every  one  at  all  familiar  with  the  facts 
knew  that  the  Austrian  Empire  was  in  no  financial 
condition  to  endure  the  strain  of  war.  When, 
therefore,  on  Monday,  the  27  th,  the  Vienna  stock 
exchange  closed  its  doors,  followed  by  the  govern- 
ment's declaration  of  war  on  Servia  next  day,  the 
outside  financial  community  was  still  suspending 
judgment. 

Its  attitude  was  not  long  left  in  doubt.     It  is 


30  THE  WAR  PANIC 

the  commonplace  of  financial  philosophy  that  the 
stock  market  moves  as  much  by  instinct  as  by 
private  information,  and  the  closing  of  a  stock 
exhange  is  an  evidence  of  apprehension  far  more 
convincing  than  a  fall  in  prices.  It  was  not  tmtil 
Friday,  July  31,  that  the  German  Government 
sent  its  ultimatum  to  Russia  and  France,  followed 
by  actual  war  next  day.  But  on  the  27th  the 
Brussels  stock  exchange  had  formally  suspended 
business;  on  the  28th  the  Paris  Bourse  shut  down; 
on  the  29th  the  exchanges  at  Saint  Petersburg  and 
Amsterdam  closed  their  doors;  and  on  the  same 
day  Berlin  itself  forbade  all  iurther  dealings  on 
credit,  limiting  stock-market  operations  wholly  to 
cash  transactions.  During  all  this  seven-day  pe- 
riod, sales  of  securities  by  Berlin  on  every  foreign 
market  (notably  New  York)  seemed  to  be  limited 
only  by  the  supply  available  to  sell  and  the  capac- 
ity of  brokers  to  execute  the  orders.  Private  cables 
told  of  the  published  recommendation,  by  some 
of  the  largest  German  banks,  for  their  clients  to 
sell  at  once  what  they  could  of  their  investments. 
British  consols  fell  from  75  to  69 J^,  and  all  other 
international  securities  feU  with  them.  On  Au- 
gust 5,  the  German  army  having  in  the  mean- 
time invaded  Belgium,  England  declared  a  state 
of  war  with  Germany. 

At  London,  the  world's  financial  centre,  finan- 
cial crisis  did  not  wait  for  this  action  by  the  British 
Government.     It  was  Germany's  ultimatums  of 


ON  THE  STOCK  EXCHANGES       31 

July  31  which  made  the  war  inevitable.  The 
first  financial  result  at  London  was  the  closing  of 
the  stock  exchange  on  that  day  for  an  indefinite 
period.  The  obvious  reason  for  this  sudden 
action  was  that  markets  of  every  belligerent 
state  on  the  Continent,  realizing  the  tirgent  need 
for  ready  capital  in  the  coming  economic  crisis, 
were  selling  in  London  what  foreign  securities 
they  held — ^in  quantities  nmning  high  up  in  the 
millions  of  sterling,  and  at  any  price  obtainable. 
Government  bonds  of  the  South  American  states, 
of  Russia,  Japan,  and  China,  railway  stocks  of 
the  United  States  and  Canada,  were  being  thrown 
on  London's  market  by  the  Continent  at  declines 
nmning  in  many  cases  from  10  or  30  per  cent 
within  a  very  few  days,  the  declines  becoming 
more  violent  every  day.  On  Lombard  Street 
these  securities  are  pledged  in  immense  amounts 
as  security  against  loans  obtained  from  banks. 
Although  probably  less  than  usual  was  outstand- 
ing in  these  so-called  "stock-exchange  loans'* 
when  the  war  began,  the  subsequent  report  of  a 
Lombard  Street  bankers'  committee  reckoned  the 
total  at  $400,000,000.  Much  longer  continuance 
of  such  a  decline  in  prices  would  have  reduced 
the  borrowers  to  bankruptcy,  because  they  could 
not  keep  the  security  up  to  the  face  value  of  their 
loans,  and  would  have  crippled  the  banks  because 
they  could  not  collect  the  loans. 

Back  of  this  stood  the  further  fact  that  London 


32  THE  WAR  PANIC 

could  not  allow  Berlin,  whose  own  stock  exchange 
had  already  virtually  suspended  operations,  to 
acciunulate  sinews  of  war  by  raising  cash  on  the 
English  market.  These  various  possible  results 
could  be  averted  only  by  closing  the  stock  exchange 
entirely;  for  only  through  the  machinery  of  such 
an  organized  exchange  could  the  huge  mass  of 
securities  thus  offered  find  a  market.  London's 
example  was  promptly  followed  by  every  other 
stock  exchange  in  the  world  which  had  not  al- 
ready closed.  New  York's  shut  down  an  hour 
after  London's,  though  most  reluctantly  and  in 
spite  of  the  previous  night's  formal  decision  to  the 
contrary.  Nothing  was  more  certain  than  that 
the  closing  at  London,  with  New  York  still  open 
for  business,  would  converge  on  the  American 
market  the  whole  violence  of  the  Continent's 
forced  sale  of  securities  with  equally  heavy  selling 
by  London  itself. 

This  closing  of  the  stock  exchange  was  in  its 
way  a  dramatic  testimony  to  the  magnitude  of 
the  financial  crisis;  for  at  London  no  such  action 
had  ever  before  been  taken — ^not  even  during  the 
Napoleonic  wars.  The  Paris  Bourse  had  closed 
down  for  several  months  during  the  Prussian 
invasion  of  1870  and  the  New  York  Stock  Ex- 
change for  ten  days  in  the  panic  of  1873;  but 
even  with  those  markets  it  was  a  very  temporary 
incident  of  bygone  history,  whose  repetition  no 


K^ 


THE  CRISIS  AT  LONDON  33 

one  had  predicted.  This  unprecedented  action 
at  London,  however,  was  only  the  beginning  for  a 
series  of  events  which  equally  marked  new  prece- 
dent. 

The  two  events  which  would  probably  have 
seemed  to  the  financial  world  most  inconceivable, 
only  a  week  or  two  before,  would  have  been  a  run 
on  the  Bank  of  England  and  a  breakdown  of 
public  confidence  in  the  English  currency.  It  is 
true,  the  history  of  other  countries  had  proved 
that  when  great  wars  break  out,  a  run  on  the 
banks  will  usually  be  started  by  people  who  want 
to  turn  their  bank-notes  or  government  paper  into 
gold,  and  hoard  the  gold.  The  teaching  of  experi-  -^T^ 
ence,  as  well  as  instinct,  warns  holders  of  paper 
money  that  its  value  may  be  heavily  depreciated 
through  increased  issues  of  such  paper  for  war  ex- 
penses, whether  by  the  government  or  the  banks. 
The  nm  on  the  Bank  of  France  in  1870,  leading  to 
its  suspension  of  gold  payments  on  the  ciirrency, 
and  the  concerted  refusal  of  the  New  York  banks 
in  December,  1861,  to  pay  out  gold  to  customers 
any  longer,  were  noteworthy  modem  instances. 
In  1797,  when  the  long  war  between  England  and 
France  began,  the  Bank  of  England  itself  sus- 
pended specie  payments;  that  is  to  say,  it  ceased 
to  guarantee  redemption  of  its  notes  in  gold,  and 
did  not  resume  such  full  and  free  redemption 
during   the    twenty-four   succeeding   years.      In 


34  ^  THE  WAR  PANIC 

August,  1 9 14,  almost  the  first  financial  act  by 
official  Germany  was  a  similar  suspension  of  gold 
payments. 

On  Satin-day,  August  i,  a  run  began  on  the 
Bank  of  England.  The  circumstances  immediately 
surroimding  that  event  were,  however,  so  peculiar 
as  to  render  it  impossible  even  now  to  say  whether 
the  episode  was  or  was  not  really  in  line  with  the 
usual  phenomena  of  a  bank  run.  During  the 
summer  season  England  sets  apart  the  first  Mon- 
day of  every  month  as  a  business  hoHday.  The 
news  of  Germany's  ultimatum  to  France  and 
Russia  arrived  on  the  very  Saturday  when  Lon- 
don people,  preparing  for  their  two-day  midsimi- 
mer  outing,  were  going  to  their  banks  to  draw  the 
requisite  pocket  money.  The  English  currency 
provided  no  imit  of  general  circulation  of  a  value 
between  the  silver  half-crown  piece  worth  slightly 
over  60  cents  and  the  £5  Bank  of  England  note 
worth  $25,  except  the  gold  sovereign  and  half- 
sovereign.  Therefore,  without  any  necessary  pur- 
pose of  hoarding  gold,  the  London  people,  planning 
for  the  holiday,  brought  their  five-pound  notes  to 
their  banks  to  be  exchanged  into  gold.  A  few 
private  banks,  frightened  at  the  war  situation, 
refused  to  give  out  gold  (it  is  usually  such  action 
of  bankers  themselves  which  starts  a  panic),  and 
holders  of  the  notes  thereupon  went  to  the  Bank 
of  England,  which  could  not  refuse. 


RUN  ON  THE  BANK  35  ^ 

All  such  bank  runs  grow  from  the  very  fact 
that  they  have  begun.  How  many  of  the  appli- 
cants for  gold  were  merely  prospective  holiday- 
makers  nobody  can  know;  one  of  the  English 
writers  on  the  episode,  himself  a  "City  man," 
has  said  that  the  crowd  at  the  bank  was  ''bruited 
abroad  as  a  novel  spectacle,"  and  was  watched 
"by  a  throng  of  amused  spectators,  mostly  straw- 
hatted  and  in  holiday  attire,  gathered  on  the 
steps  of  the  Royal  Exchange."  But  a  nm  un- 
doubtedly existed,  and  we  shall  never  know  to 
what  proportions  it  might  have  risen  but  for  the 
fact  that  the  bank  was  open  only  for  two  hours 
on  that  Saturday,  and  that  a  two-day  holiday 
followed.  Even  as  it  was,  withdrawal  of  gold 
from  the  Bank  of  England,  both  by  individual 
holders  of  notes  and  by  other  banks,  was  so  great 
that  in  its  next  weekly  statement  the  institution 
had  to  report  the  enormous  loss  of  $52,500,000, 
and  a  fall  in  its  ratio  of  reserve  to  deposit  liabili- 
ties to  the  startlingly  low  figure  of  14^  per  cent, 
whereas  40  per  cent  is  the  bank's  traditional 
minimum  of  safety.  The  ratio  had  been  4o>^ 
per  cent  a  week  before,  and  56  per  cent  at  the 
same  date  a  year  before.  No  such  showing  of 
depleted  gold  reserve  had  been  made  by  the  bank 
since  the  panic  of  1866. 

Nor  was  this  the  end  of  the  "currency  panic," 
even  for  the  period  of  English  holidays.     The 


36  THE  WAR  PANIC 

warning  word  that  English  paper  money  might 
possibly  be  no  longer  exchangeable  for  gold  spread 
instantly  throughout  the  community.  People 
with  gold  coin  in  their  tills  or  pockets  refused  to 
give  it  up,  and  within  twenty-four  hours  English- 
men found  it  impossible  to  make  purchases  with 
Bank  of  England  notes,  if  the  amount  of  the  pur- 
chase compelled  the  seller  to  make  change.  As 
the  sense  of  unreasoning  panic  spread,  house- 
holders began  to  accumulate  and  hoard  provisions 
as  well  as  gold. 

On  the  Continent,  for  similar  reasons,  Eng- 
lish bank-notes  were  refused  when  tendered  in 
payment,  and,  what  was  much  more  disturbing, 
continental  banks  refused  to  cash  letters  of  credit 
or  bankers'  drafts  made  payable  at  London. 
Dining  nearly  a  week  after  the  panic  had  begim, 
gold  was  the  only  available  medium  of  exchange. 
For  a  time,  indeed,  even  gold  coin  of  another 
coimtry  was  refused.  When  business  closed  for 
the  day  at  the  Bank  of  England  on  August  i, 
1 9 14,  it  is  perfectly  safe  to  say  that  no  one,  how- 
ever experienced  in  the  course  of  economic  crises, 
knew  what  would  be  the  financial  case  of  Eng- 
land, or  of  Europe  as  a  whole,  when  the  next 
business  day  should  begin. 


y 


CHAPTER  III 

EMERGENCY  EXPEDIENTS 

THERE  were  two  traditional  measures  of 
protection  for  the  Bank  of  England  in  such 
emergencies  as  I  have  just  described.  Both 
had  been  utilized  in  preceding  London  panics. 
The  bank  may  advance  its  official  rate  for  loans;  >^ 
an  action  which  in  ordinary  times,  by  forcing  up 
also  the  rate  bid  for  money  by  the  general  London 
market,  will  cause  a  transfer  of  capital  to  London 
from  other  markets  whose  rate  had  remained  un- 
changed, and,  along  with  such  transfer  of  capital, 
will  start  import  of  gold.  The  governors  of  the  "^ 
bank  may  also,  with  the  British  Government's 
permission,  suspend  the  Bank  Act  which  requires 
the  bank  to  issue  no  new  notes,  imless  specifically 
secured  by  the  same  amount  of  gold  on  hand  in 
the  institution's  vaults.  The  purpose  of  that 
action,  as  appHed  in  the  London  panics  of  1866 
and  1857,  is  to  provide  currency  wherewith  to 
maintain  or  increase  reserves  of  cash  at  the  pri- 
vate English  banks,  without  waiting  for  the  Bank 
of  England  to  accumulate  gold. 

As  we  shall  see,  neither  expedient  could  ade- 
quately have  met  the  situation  of  19 14.    Yet  the 

37 


38  EMERGENCY  EXPEDIENTS 

bank  applied  the  first  expedient  at  once.  On 
July  30  its  official  discount  rate  was  3  per  cent; 
it  was  raised  to  4  that  day,  to  8  on  the  31st,  and 
to  10  on  the  ist  of  August.  The  10  per  cent  rate 
was  the  highest  ever  fixed  by  the  Bank  of  Eng- 
land; it  had  never  been  approximated  since  the 
great  London  money  panic  of  1866.  At  the  same 
time  the  government  authorized  suspension  of  the 
Bank  Act — a  step  taken  since  the  act  was  passed 
in  1844  only  on  two  occasions,  in  the  panics  of 
1857  and  1866.  The  bank  did  not  make  use  of 
the  government's  authorization  in  August,  19 14, 
nor  did  it  retain  for  more  than  a  few  days  its  10 
per  cent  discotmt  rate.  That  rate  was  reduced 
on  August  6  to  6  per  cent,  and  on  August  8  to  5 
— at  which  it  remained  during  practically  the 
whole  of  the  two  succeeding  years. 

It  would  probably  not  be  unfair  to  say  that 
both  of  these  first  incidents  were  in  actual  fact  the 
result  and  symptom  of  panic  on  the  part  of  bank 
and  government  themselves.  It  has,  indeed,  been 
quite  invariably  true  of  every  sudden  and  grave 
financial  crisis — ^notably  of  1907  and  1893  and 
1873  in  the  United  States  and  of  1890  and  1866 
at  London — that  imreasoning  consternation  got 
possession  momentarily  of  the  very  people  and 
institutions  whose  business  it  is  to  allay  the  panic 
of  others.  That  this  should  have  happened  on 
August  I,  1 9 14,  when  the  financial  crisis  threaten- 


LOMBARD  STREET'S  PROBLEM      39 

ing  London  (all  the  circumstances  considered) 
was  undoubtedly  the  most  formidable  in  the  his- 
tory of  the  world,  and  when,  moreover,  outright 
collapse  of  credit  at  London  would  have  sent 
Great  Britain  into  the  war  financially  crippled  in 
advance,  was  certainly  no  matter  for  surprise. 
But  during  Simday,  August  2,  and  Monday,  a 
legal  holiday,  England's  statesmen  and  financial 
leaders  had  a  very  useful  breathing  space  in  which 
to  decide  how  really  to  meet  the  coming  crisis. 

The  problem  could  not  be  solved  on  the  lines 
of  financial  precedent,  yet  it  had  to  be  solved  at 
once.  It  must  be  remembered  that  England  had 
not  yet  declared  war  on  Germany.  The  govern- 
ment and  the  great  financiers  imdoubtedly  knew, 
on  August  I,  that  Germany  was  invading  Belgium 
and  that  England  would  have  to  go  to  war.  But 
the  people  at  large  did  not  know  it.  As  a  matter 
of  fact,  formal  declaration  of  war  was  not  made 
tmtil  Wednesday,  August  5.  Then  was  the  time, 
according  to  all  experience,  to  look  for  the  crisis 
of  financial  panic.  The  stock  exchange,  tradition- 
ally responsive  to  such  influences  in  advance  of 
the  rest  of  the  community,  had  already  suspended 
business,  thereby  confessing  publicly  that  it  could 
not  face  the  shock.  What  was  to  happen  next, 
and  how  were  the  consequences  to  be  averted  ? 

There  were  three  portentous  possibilities  which, 
in  the  absence  of  protective  measiu-es  of  unprece- 


40  ^     EMERGENCY  EXPEDIENTS 

dented  character,  were  reasonable  certainties. 
The  first  was  another  run  on  the  private  banks 
for  cash  and  on  the  Bank  of  England  for  gold — a 
run  vastly  more  dangerous  in  its  probable  scope 
and  consequences  than  the  run  of  Friday  and 
Saturday.  The  second  was  a  sudden  call  by  y 
creditors  for  instant  payment  in  cash  of  all  sums 
due  them  on  notes  or  bills  or  contracts;  such  de- 
mand being  made  at  the  moment  when  the  banks 
were  shaking,  when  money  could  not  be  raised  by 
sale  of  securities  on  the  stock  exchange,  and  when, 
therefore,  the  demand  for  payment  would  mean 
bankruptcy  of  the  debtors.  These  two  possibil- 
ities had  been  familiar  in  previous  financial  pan- 
ics, though  perhaps  never  before  in  more  alarming 
shape. 

But  the  third  possibility  was  something  with 
which  no  great  financial  market  had  ever  been 
confronted  since  the  modem  credit  system  was 
established.  [To  London — the  banking  centre  of,/' 
the  world,  tne  lender  of  capital  to  every  other 
coimtry,  the  market  which  provides  credit  facili- 
ties to  all  foreign  markets  to  finance  the  world's 
international  trade — the  indebtedness  of  foreign 
markets  when  the  war  began  was  of  stupendous 
magnitude.  At  first  glance,  this  fact  might  seem 
to  have  been  a  strong  point  in  the  situation;  and 
so  it  was  rather  generally  considered  by  the  com- 
mimity  at  large,  before  the  war  began  and  for  a 


ENGLAND'S  FOREIGN  LOANS       41 

very  short  time  after  its  outbreak.  But  financial 
London  soon  learned  better.  It  was  one  thing  to 
have,  on  the  books  of  London  bankers,  credits  for 
hundreds  of  millions  sterling  in  the  shape  of  loans 
to  foreign  countries;  it  was  a  very  different 
matter  to  collect  them.  If  these  foreign  credits 
were  in  the  form  of  stocks  and  bonds  issued  by 
borrowing  companies  or  governments  and  held 
by  London  capitalists,  the  stock  exchanges  of  the 
world  were  closed  against  the  sale  of  them.  If 
they  were  short-term  loans  granted  to  merchants 
by  London  for  the  purpose  of  conducting  the  out- 
side world's  immense  international  commerce — to 
pay  the  expense  of  production,  manufacture,  and 
transportation  of  the  goods,  with  the  two  or  three 
months'  note  of  the  purchaser  turned  over  as 
security  for  repayment  when  the  goods  should 
have  been  sold  to  the  actual  consimier — ^no  such 
indebtedness  would  be  repaid  by  countries  with 
whom  England  should  be  at  war,  and  it  was  prob- 
able that,  in  the  world-wide  collapse  of  credit,  it 
could  not  be  paid  by  England's  allies  or  by  neu- 
tral coimtriesr3 

Had  the  problem  merely  involved  delay  in 
collection  by  English  bankers  of  what  was  owing 
to  them — if  nothing  but  their  own  capital  had  been 
at  stake — the  situation  would  have  been  awk- 
ward, perhaps  embarrassing,  but  not  necessarily 
critical.     It  would  doubtless  have  necessitated 


42  EMERGENCY  EXPEDIENTS 

postponement  of  other  business  plans  with  the 
further  result,  in  some  instances,  of  pecuniary  , 
hardship.  But  the  system  of  international  bank-  X 
ing  was  such  as  to  put  a  far  darker  color  on  the 
consequences  of  non-payment  by  such  foreign 
borrowers.  It  was  the  proceeds  of  these  short- 
term  loans,  as  they  matured  from  time  to  time, 
on  which  the  London  houses  relied  for  payment 
of  other  short-term  loans  raised  by  themselves 
from  banks  or  other  banking-houses  in  Great 
Britain.  The  immense  sums  owed  to  Lombard 
Street  bankers  on  current  accoimt  by  Germany 
and  Austria,  for  example,  were  offset  by  almost 
or  quite  as  large  obligations  of  those  bankers  to 
home  institutions.  The  machinery  of  finance 
was  so  arranged  that  these  home  obligations 
would  be  met,  when  they  matured,  through  pay- 
ment of  simultaneously  maturing  indebtedness  by 
the  foreign  markets. 

[But  the  instant  that  war  was  declared  with 
Germany,  payment  of  all  such  indebtedness  to 
Lombard  Street  would  end;  yet  the  home  obliga- 
tions set  against  it  would  fall  due  as  usual,  and 
the  credit  of  other  English  firms  and  institutions 
was  staked  on  the  payment  of  them.  What  was 
to  be  the  consequence?  It  was  easy  on  August 
I,  1 9 14,  to  imagine  coming  annoimcement  of  in- 
solvency by  the  most  powerful  banking-houses  in 
Great  Britain.     The  condition  of  things  which 


THE  **  SPECIAL  HOLIDAYS"        43 

had  arisen  explains  why  the  German  financiers 
and  statesmen,  then  and  during  the  progress  of 
the  war,  reiterated  in  a  triumphant  manner  the 
seeming  paradox  that  one  of  Germany's  most 
powerful  advantages  over  England  lay  in  the  fact 
that  the  German  market's  loans  to  the  outside 
world  were  so  much  smaller  than  those  of  London. 
There  was  a  good  deal  of  fallacy  in  the  argument ; 
Germany's  own  international  finance  was  in  a 
tangle,  and  the  later  financial  chapters  of  the  war 
were  destined  to  prove  the  real  value  of  England's 
position  in  regard  to  the  outside  commercial 
world.  But  the  embarrassment  of  financial  Lon- 
don at  the  start  was  very  critical. 

The  protective  measures  taken  by  the  banks 
and  government  in  England  were  four  in  number. 
All  of  them  were  imprecedented  in  the  history  of 
English  finance.  Each  of  them  amoimted  to 
confession  that  the  existing  credit  system  had 
broken  down.  None  of  them  wotdd  have  been 
considered,  two  or  three  weeks  before,  as  a  con- 
ceivable occurrence  in  London's  financial  history. 

First,  the  government  declared  the  two  days 
following  ''bank  holiday,"  Monday,  August  3,  to 
be  special  legal  holidays;  which  meant  that  de- 
positors cotdd  not  draw  money  from  the  banks 
during  that  three-day  period,  and  that  payment 
of  maturing  notes  and  bills  could  not  be  required 
\mtil  Thursday.    For  London  this  was  a  startling 


^ 


44  '^      EMERGENCY  EXPEDIENTS 

innovation.  Its  only  precedent  was  the  similar  ^ 
declaration  of  "special  holidays,"  during  our  panic 
of  1907,  by  the  legislatures  of  California,  Nevada, 
and  Oklahoma — an  action  taken  to  avert  the 
threatened  bank  runs  of  the  period,  and  discussed 
in  Europe,  at  the  time,  as  illustrating  the  primitive 
methods  and  impulsive  action  of  our  Western 
commimities.  But  the  London  "special  holidays" 
of  August,  1 9 14,  were  designed  not  only  to  prevent 
a  run  on  the  banks,  or  to  give  the  financial  com- 
munity as  a  whole  a  chance  to  recover  its  wits. 
The  three-day  respite  was  instantly  utilized  for  X^ 
the  second  protective  measure;  preparation  of  an 
"emergency  currency"  to  be  issued  under  govern- 
ment auspices. 

This  was  something  which  had  never  been 
done  before  in  English  history.  But  a  moment's 
reflection  had  convinced  both  statesmen  and 
financiers  that  neither  a  10  per  cent  Bank  of  Eng- 
land rate,  nor  permission  for  the  bank  to  issue 
notes  not  "covered"  with  gold  in  the  institution's 
vaults,  would  meet  the  situation.  No  bid  for 
money  could  be  high  enough  to  draw  gold  from 
foreign  markets  whose  own  banks  had  already 
suspended  gold  payments.  No  additional  issue 
of  £5  notes,  the  lowest  denomination  permitted 
to  the  Bank  of  England,  would  prevent  the  draw- 
ing out  of  gold.  We  have  seen  how  the  people 
of  England,  during  the  three-day  holiday,   were 


WAR  CURRENCY  IN  ENGLAND  45 

unable  to  make  small  payments  with  Bank  of 
England  notes.  The  ''change"  for  such  pay- 
ments would  have  been  gold,  and  gold  was  al- 
ready being  hoarded.  ^ 

What  the  treasury  did,  then,  as  the  second  of  >^ 
the  protective  expedients,  was  to  issue,  in  de- 
nominations of  10  and  20  shillings,  legal-tender 
paper  currency.  These  so-called  *  *  currency  notes '  * 
were  issued  through  the  Bank  of  England  to  other 
banks,  which  pledged  against  the  notes  an  equiv- 
alent amount  of  commercial  paper,  British  Gov- 
ernment securities,  or  credits  with  the  Bank  of 
England.  At  the  end  of  August,  $125,500,000  of 
this  new  currency  was  in  circulation;  at  the  end 
of  1914,  $192,300,000;  at  the  end  of  1915,  $515,- 
600,000;  and  it  increased  niorethan  $134,000,000 
in  the  next  eight  months. 

As  for  the  economic  character  and  economic 
results  of  this  remarkable  experiment,  for  the 
present  it  need  only  be  said  that  the  hurried  is- 
sue of  this  currency  in  the  *'war  panic"  ended  the 
rtm  on  the  banks,  that  it  provided  the  requisite 
small  money  for  the  people,  and  that  it  apparently 
stopped  the  hoarding  of  gold.  It  is  highly  in- 
teresting to  observe  that  these  emergency  paper 
issues,  although  an  absolute  innovation  in  English 
financial  history,  closely  resembled  in  some  re- 
spects our  own  old  national  bank  currency  se- 
cured by  United  States  Government  bonds,  in 


46  EMERGENCY  EXPEDIENTS 

others  the  so-called  ''Aldrich-Vreeland  emer- 
gency currency,"  authorized  by  our  law  of  1908 
and  based  on  securities  and  commercial  assets. 
It  was  an  irony  of  circumstance  that  English 
financial  opinion  had  heartily  disapproved  of 
both  of  these  American  systems;  each  of  which 
has  in  fact  been  now  superseded  by  the  new 
Federal  Reserve  system. 

The  menace  of  a  general  ''bank  run"  being 
thus  averted,  there  arose  the  problem  of  dealing 
with  a  sudden  and  general  demand  of  creditors 
for  payment  of  money  owing  to  them.  When  the 
Balkan  War  of  191 2  broke  out,  the  business  com- 
munities of  western  Eiu-ope  were  interested  and 
considerably  annoyed  by  receiving,  from  the 
chambers  of  commerce  in  Bulgaria  and  Servia, 
formal  announcement  that,  since  all  the  business 
men  were  at  the  front  and  since  their  earning 
capacity  was  therefore  interrupted,  a  "mora- 
torium" on  debts  had  therefore  been  proclaimed. 
The  debts,  whether  owed  to  home  or  foreign 
creditors,  were  not  repudiated;  but,  no  matter 
when  their  payment  properly  fell  due,  they  would 
not  be  paid  imtil  after  the  war.  The  great  finan- 
cial markets  of  the  world  looked  upon  that  an- 
nouncement much  as  it  did  on  the  news  of  the 
''special  holidays"  in  our  Western  States  in  No- 
vember, 1907.  But  in  the  one  case  as  in  the 
other,  London  had  to  follow  in  19 14  the  example 


THE  "MORATORIUM'*  47 

of  these  other  humble  financial  markets.     This 
was  the  third  expedient  to  meet  the  crisis.  / 

On  Thursday,  August  6,  a  royal  proclamation  •<!'^ 
declared  that  all  payments  due  on  August  4,  or 
falling  due  on  September  4  under  a  contract 
drawn  before  August  4,  "shall  be  deemed  to  be 
due  and  payable  on  a  day  one  calendar  month 
after  the  day  on  which  the  payment  originally 
became  due . ' '  This  '  *  moratorium ' '  (the  word  now 
became  f  amiHar  in  European  high  finance)  was  ex- 
pressly stated  not  to  apply  to  wages  and  salaries, 
or  to  indebtedness  below  £5,  or  to  rates  and  taxes, 
or  to  interest  and  dividends  on  securities,  or  to 
government  payments,  or  to  bank-notes,  or  to 
ocean  freights,  or  to  indebtedness  due  by  indi- 
viduals, firms,  or  institutions  doing  business  out- 
side the  British  Islands.  With  some  alterations 
and  amendments,  the  original  proclamation  was 
twice  extended,  carrying  the  date  of  the  mora- 
torium forward  to  November  4,  19 14.  By  that 
time — and,  indeed,  in  the  case  of  most  institu- 
tions by  September — panic  conditions  had  so  far 
disappeared  that  business  houses  with  maturing 
obligations  relinquished  the  privileges  of  the 
proclamation  voluntarily.  Meantime,  however, 
although  the  threatened  chapter  of  bankruptcy 
was  averted,  the  machinery  of  financial  London, 
as  of  financial  Europe  generally  and  of  financial 
America,   came   almost  to  a  halt.    When  pay- 


48  EMERGENCY  EXPEDIENTS 

ment  of  indebtedness  due  to  a  business  house  is 
arbitrarily  postponed  by  law,  the  creditor  might 
protect  himself  by  demanding  similar  postpone- 
ment of  what  he  owed  to  some  one  else.  But  such 
a  condition  of  things  would  certainly  not  encour- 
age him  to  embark  on  other  business  under- 
takings. 

His  eye  would  be  fixed  almost  exclusively  on 
the  problem  of  disentangling  himself  from  his 
embarrassing  and  humiliating  position.  It  was 
instantly  perceived  that  long  continuance  of  that 
situation  would  very  possibly  cause  paralysis  to 
England's  home  trade  and  foreign  commerce. 
Nor,  indeed,  was  this  the  only  danger.  The  mora- 
torium, applying  as  it  did  to  '*all  payments  due 
on  August  4,"  covered  indebtedness  of  English 
firms  to  foreign  creditors.  It  was  a  matter  of  far 
more  serious  concern  to  London's  prestige  as  the 
money  centre  of  the  world  that  financial  England 
should  suspend  payments  to  the  foreign  markets, 
than  that  payments  of  Englishmen  to  English- 
men should  be  deferred.  We  shall  presently  meet, 
in  our  narrative,  some  very  tangible  and  very 
grave  results  of  this  international  moratoriimi. 
As  it  stood  it  distinctly  menaced  London's  eco- 
nomic position,  and  the  next  and  fourth  expedient 
adopted  was  directed  to  avert  that  imminent 
calamity.  The  problem  was  how  to  untie  the 
hands  of  bankers  and  banking-houses  who,  im- 


ENTANGLEMENTS  OF  BANKERS     49 

able  to  collect  and  use  the  huge  sums  owed  to 
them  in  connection  with  their  foreign  business, 
could  not  stir.  The  moratoriimi  had  averted  the 
immediate  consequences,  because  the  bankers 
were  relieved  from  paying  the  equally  great  simis 
which  they  themselves  owed  at  home.  But  this 
only  shifted  the  burden  to  the  shoulders  of  other 
houses;  and  moreover  the  moratoriimi,  as  we 
have  seen,  ran  only  for  a  month  at  first,  and  even 
its  prolongations  were  known  to  be  purely  tem- 
porary. It  could  not  be  extended  throughout  the 
war;  yet  its  final  termination  would  leave  these 
banking-houses  with  their  home  liabilities  as  press- 
ing as  on  August  i,  with  the  stock  exchange  still 
closed  against  sale  of  their  securities  and  with  their 
foreign  assets  equally  beyond  their  reach.  The 
result  inevitably  was  that  the  great  lending  firms 
and  institutions  dared  not  increase  their  loans. 
They  had  their  own  position  to  fortify,  and  the 
market  in  which  the  drafts  were  discounted  for 
the  conducting  of  England's  foreign  trade  began 
to  shrink  alarmingly. 

It  was  then,  on  August  13,  that  a  very  bold 
and  remarkable  step  was  taken.  The  government 
announced  that  the  Bank  of  England  was  pre- 
pared to  take  over  from  these  international 
bankers  all  the  "approved  bills  of  exchange"  for 
which  they  were  liable  on  transactions  prior  to 
August  4.     The  bank  would  provide  the  fimds 


50  EMERGENCY  EXPEDIENTS 

requisite  to  pay  off  these  bills  at  maturity.  The 
bankers  would  still  remain  ultimately  responsible 
for  payment,  and  that  liability  may  cut  a  figure 
in  London's  financial  history  after  the  war. 
Furthermore,  to  stimulate  earlier  repayment  by 
the  bankers,  the  rate  of  interest  charged  by  the 
Bank  of  England  for  its  services  was  to  be  2  per 
cent  above  the  official  bank  rate;  and,  although 
that  official  rate  had  been  reduced  from  10  per 
cent  to  5,  even  that  change  left  the  rate  for  "re- 
discount" very  heavy.  But  the  Bank  of  England 
agreed  not  to  claim  repayment  from  the  bankers 
for  a  period  of  one  year  after  the  close  of  the  war, 
and  the  government  of  Great  Britain  "agreed  to 
guarantee  the  Bank  of  England  from  any  loss  it 
may  incur"  in  discounting  such  bills  of  exchange, 
"either  home  or  foreign,  bank  or  trade,  accepted 
prior  to  August  4,  19 14."  The  chancellor  of  the 
exchequer  subsequently  stated  to  Parliament 
that  between  $1,500,000,000  and  $2,500,000,000 
of  such  bills  were  believed  to  have  been  outstand- 
ing when  the  war  began,  and  that  of  this  total 
$600,000,000  had  been  taken  over  by  the  Bank  of 
England.  As  was  to  be  expected,  this  arrange- 
ment had  some  extraordinary  results  in  the  oper- 
ations of  the  Bank  of  England.  Wholly  apart 
from  advances  made  by  the  bank  to  the  govern- 
ment, its  loan  account  rose  from  $236,500,000  on 
July  30  to  $609,100,000  as  early  as  September  3. 


THE  OUTSIDE  WORLD  51 

On  Jtily  29,  191 5,  it  reached  its  maximum  of 
$960,900,000.  From  that  time  forward,  chiefly 
because  the  *'moratoriimi  bills"  were  being  so 
rapidly  paid  off  from  the  accruing  resources  of  the 
banking-houses,  the  Bank  of  England's  huge  loan 
account  was  gradually  and  progressively  reduced. 
By  the  first  week  of  June,  191 6,  it  was  down  to 
the  lowest  total  since  the  war  began. 

I  have  reviewed  in  this  chapter  the  expedients 
by  which  financial  London  and  the  British  Gov- 
ernment met  the  crisis.  Adopted  as  they  were  in 
the  central  money  market  of  the  world,  where 
each  and  all  of  them  were  previously  imheard-of 
innovations,  and  where  each  was  a  measure  in- 
conceivable to  the  financial  mind  a  very  few 
months  before,  this  story  of  England's  action  in 
the  war  crisis  sufficiently  indicates  the  experience 
of  the  whole  financial  world.  To  set  forth  in 
equal  detail  the  similar  decrees  and  policies  of  the 
other  belligerents  and  of  the  neutral  coimtries 
would  extend  this  narrative  too  far.  No  state 
other  than  England  adopted  the  extraordinarily 
sweeping  plan  for  asstmiption  of  bankers'  non- 
collectible  debts  by  the  central  banking  institu- 
tion. But  almost  every  belligerent,  and  with 
them  so  financially  powerful  a  neutral  state  as 
Holland,  resorted  in  some  way  or  another,  tem- 
porarily or  permanently,  to  an  "emergency  cur- 
rency."    Germany  did  not  officially  declare  a 


iS2  EMERGENCY  EXPEDIENTS 

moratorium  on  debts,  though  the  government 
intervened  to  render  the  action  of  the  courts 
sufficiently  lenient  to  achieve  the  same  ends. 
France  extended  its  moratoritim  even  to  rents, 
with  inevitable  after-complications. 

Practically  all  of  the  moratoriums  expired  of- 
ficially, early  in  191 5.  But  nothing  could  better 
illustrate  the  world-wide  scope  of  the  financial 
shock  which  came  with  the  outbreak  of  the  war, 
than  the  array  of  countries  and  markets  which 
resorted  to  this  postponement  of  payments 
through  governmental  decree.  It  was  not  only 
the  Ein*opean  belligerents  which  had  recourse  to 
it.  A  formal  moratorium  was  proclaimed  at  once 
in  Denmark,  in  Italy,  in  Norway,  in  Egypt,  in 
Greece,  in  Portugal,  in  Rumania,  in  Sweden 
(where  it  continued  with  certain  limitations  up 
X  to  the  auttimn  of  191 5).  Holland  decreed  special 
measures  for  extension  of  time  to  debtors.  That 
Argentina,  New  Zealand,  Paraguay,  Nicaragua, 
Peru,  and  South  Africa  should  have  suspended 
such  settlements  from  July,  19 14,  up  to  a  date 
frequently  fixed  well  into  191 5,  was  a  demonstra- 
tion, partly,  no  doubt,  of  the  enormous  shock 
precipitated  by  the  London  panic,  but  chiefly  of 
the  extent  to  which  the  European  War  itself  had 
deranged  the  entire  economic  system  of  the  world. 


CHAPTER   IV 
FINANCING  THE  WAR 

EMERGING  from  the  financial,  commercial, 
and  industrial  panic  of  August,  1914,  bel- 
ligerent Europe  was  confronted  with  the 
problem  of  meeting  the  war  expenditure.  Into 
the  complete  and  very  intricate  details  of  the 
fiscal  operations  involved  in  this  stupendous  task 
I  shall  not  undertake  to  go.  But  the  immediate 
and  the  later  achievements  are  of  special  eco- 
nomic interest  from  their  conclusive  demonstra- 
tion of  the  extent  to  which  the  world's  resources 
of  available  capital  were  underrated  when  this  war 
began,  as  indeed  they  have  been  on  every  similar 
occasion  in  modem  history.  The  nature  of  the 
task  which  at  once  confronted  public  exchequers 
in  the  fighting  states  may  be  judged  from  the  fact 
that,  whereas  the  British  Government's  average 
daily  expenditure  for  aU  purposes,  in  the  official 
£welvemonth  ending  March  31,  1914,  was  $2,750,- 
000,  daily  expenditure  for  war  alone  reached 
$10,000,000  even  in  August,  1914,  and  averaged 
$25,000,000  before  the  second  year  of  war  was 
ended.  A  year  after  the  outbreak  of  the  war 
the  German  finance  minister,  when  annoimcing 

53 


54  FINANCING  THE  WAR 

in  the  Reichstag  the  third  imperial  war  loan, 
stated  that  the  daily  cost  of  war  to  all  the  fighting 
Powers  had  risen  to  $75,000,000;  the  monthly 
cost  to  more  than  $2,000,000,000;  the  yearly  cost 
to  something  like  $25,000,000,000.  The  speech 
containing  those  estimates  was  made,  moreover, 
before  Bulgaria  had  entered  the  war  and  before 
the  Balkan  campaign  of  191 5  had  begun. 

Germany  alone,  this  ministerial  speech  pro- 
ceeded, was  now  spending  in  a  single  month  more 
by  one-third  than  the  total  cost  of  her  Franco- 
Prussian  War.  At  the  daily  rate  of  war  expendi- 
ture then  prevailing,  it  was  possible  to  say  that 
England  would  have  paid  out,  within  six  months, 
more  than  the  United  States  Government  spent 
for  military  and  naval  purposes  in  all  the  four 
years  of  the  American  Civil  War.  It  is  commonly 
estimated  that  the  war  with  France  in  the  Na- 
poleonic period,  from  1793  to  181 5  inclusive,  cost 
England  in  the  aggregate  $4,150,000,000.  But 
the  chancellor  of  the  exchequer  declared  to  Par- 
liament at  the  end  of  191 5  that  England's  ex- 
penditiure,  during  only  the  twelvemonth  period 
ending  with  the  ensuing  March,  would  amount  to 
$7,950,000,000;  and  the  average  daily  rate  of 
outlay  was  progressively  increasing. 

These  figures  of  the  actual  waste  of  capital  in 
war  were  so  large  that  to  most  minds  they  were 
merely  bewildering.    Some  of  the  most  experi- 


THE  FIRST  VOTES  OF  CREDIT     55 

enced  international  bankers  ventured  the  posi- 
tive prediction,  at  the  beginning  of  this  year, 
that  the  belligerent  governments  woiild  not  be 
able  to  continue  raising  the  necessary  funds  after 
191 5.  This  prediction,  like  so  many  others  made 
in  the  earlier  months  of  war,  received  a  sufficient 
answer  from  the  progress  of  events.  But  the 
problem  was  of  the  highest  economic  as  well  as 
political  influence,  exactly  how  the  various  bellig- 
erent governments  managed  to  raise  these  wholly 
unprecedented  sums  of  money.  In  1907,  explain- 
ing the  strain  on  credit  and  resources  which  had 
caused  the  world-wide  economic  crisis  of  that  year, 
an  eminent  French  statistician  had  estimated  that 
the  whole  civilized  world  could  provide  annually 
for  investment  in  new  securities  only  $2,400,000,- 
000,  or  less  than  one-tenth  of  what  the  belligerent 
states,  according  to  the  German  minister's  esti- 
mate, were  actually  spending  on  war  alone  in 

1915- 

A  few  days  after  war  had  begun,  the  British 
Parliament  voted  to  the  government  a  prelimi- 
nary war  credit  of  $500,000,000;  the  German 
Reichstag  authorized  an  expenditiu-e  of  $1,250,- 
000,000;  the  other  belligerents  granted  similar 
powers  to  their  governments.  These  votes  were 
merely  a  formality;  they  left  to  the  several  finance 
ministers  the  practical  task  of  obtaining  the 
stupendous  simis.     By  the  middle  of  191 6,  the 


56  FINANCING  THE  WAR 

Parliamentary  votes  of  credit  had  amounted  to 
$14,000,000,000,  and  the  German,  French,  and 
Russian  appropriations  kept  step  with  them..i 
The  resources  of  the  great  slate  banks  were  neces- ' 
sarily  drawn  upon  at  the  start  in  the  shape  of 
huge  advances  of  credit  to  the  government.  Eng- 
land began  by  placing  with  London  bankers,  ev- 
ery week  or  fortnight,  the  temporary  obligations 
known  in  Lombard  Street  as  *' treasury  bills.'* 
They  had  only  six  months  to  run,  were  issued  in 
lots  of  $90,000,000,  and  carried  very  low  rates  of 
interest;  but  recourse  to  long-term  funded  loans 
soon  became  unavoidable.  Until  19 14,  the  largest 
single  loan  ever  issued  by  the  British  Government 
was  the  $300,000,000  Boer  War  loan  of  1901.  In 
November  of  that  year  Great  Britain  offered  to 
subscribers,  payable  in  fixed  instalments  during 
the  next  five  months,  a  thirteen-year  funded  loan 
of  $1,750,000,000,  sold  at  95  and  bearing  3^^  per 
cent  interest,  as  against  the  21^  per  cent  rate  on 
the  outstanding  British  Government  bonds — 
which,  however,  were  then  quoted  on  the  market 
below  69.  The  next  loan,  that  of  July,  1915,  was 
for  $2,900,000,000  in  4>^  per  cents. 

Germany  came  earlier  into  the  market  for  long- 
term  bonds,  offering  to  investors  a  ten-year  5  per 
cent  loan  at  97^^,  for  which  $824,000,000  was 
subscribed;  she  borrowed  $2,100,000,000  more  the 
next  February,  and  $2,800,000,000  in  the  following 


THE  NEW  FISCAL  BURDEN         57 

September.  France  relied  longer  on  the  national 
bank,  which  advanced  $580,000,000  to  the  govern- 
ment for  initial  war  expenses  and  $1,200,000,000 
in  all  during  the  first  six  months  of  war,  issuing 
note  circulation  against  the  government  obliga- 
tions deposited  in  its  vaults,  with  results  of  which 
I  shall  have  something  to  say  later  on.  But  the 
French  treasury  also  sold  to  the  public,  at  varying 
fates,  the  5  per  cent  ''national  defense  bonds" 
with  short  maturities,  which  reached  $1,500,000,- 
000  before  19 16,  having  by  that  time  been  supple- 
mented by  a  $2,762,000,000  sixteen-year  5  per 
cent  loan,  placed  with  investors  late  in  191 5,  at 
the  low  rate  of  88. 

In  addition  to  the  outlay  by  the  belligerent 
states  for  their  own  war  expenses,  the  powerful 
belligerents  made  advances  of  money  to  their 
financially  weaker  allies  in  sums  which  would  alone 
have  served  to  finance  the  whole  of  a  great  war  a 
generation  ago.  The  British  finance  minister 
has  shown  that  England,  during  the  two  first 
years  of  war,  had  loaned  upward  of  $3,000,- 
000,000  to  its  allies  and  colonies.  France,  in  the 
face  of  her  own  economic  troubles,  has  au- 
thorized advances  of  nearly  $800,000,000  to  such 
allies  as  Belgium  and  Servia.  At  the  beginning 
of  1 91 6  it  was  possible  to  state  that  the  national 
debt  of  England,  as  compared  with  its  debt  when 
war    began,    had   risen   from   $3,500,000,000   to 


FINANCING  THE  WAR 

$11,155,000,000;  of  Germany,  from  $5,200,000,- 
000  to  $11,613,000,000;  of  France,  from  $6,600,- 
000,000  to  $13,197,000,000;  and  of  Russia,  from 
$4,500,000,000  to  $8,655,000,000.  This  indebted- 
ness had  considerably  more  than  doubled  in  a  year 
and  a  half,  the  increase  being  the  prodigious  sum 
of  $24,820,000,000  for  only  four  of  the  twelve 
bejligerents. 
,  ^How  was  it  possible  for  the  people  or  the  banks 
Tv  to  provide  such  unheard-of  sums?  The  first 
answer  is  the  answer  which  the  financial  history 
of  all  great  wars  has  given — that  the  actual  re- 
sources of  available  capital,  in  a  prosperous 
modem  state,  are  always  imderestimated.  An  in- 
teresting calculation,  by  an  international  banker, 
is  that  the  whole  debt  of  England  at  the  begin- 
ning of  1916  was  only  equal  to  one  year's  total 
income  of  the  English  people,  and  that  whereas 
the  increase  in  the  debt,  as  compared  with  that  at 
the  end  of  the  Napoleonic  wars,  was  145  per  cent, 
the  estimated  annual  income  of  the  people  had 
increased  more  than  800  per  cent.  Such  estimates 
are  not  easily  susceptible  of  absolute  proof;  but 
they  show  at  least  what  factors  are  really  operat- 
ing in  the  problem.  Capital,  after  all,  is  the 
whole  world's  accumulated  wealth  and  property; 
the  real  problem  of  borrowing  governments  is 
how  to  get  in  touch  with  it. 

Almost  the  first  step  taken,  by  all  the  Powers 


RESTRICTIONS  ON  MARKETS       59 

confronted  with  these  enormous  requisitions  for 
the  war,  was  to  stop  the  subscribing  of  home  in- 
vestment capital  to  other  new  securities.  The- 
EngHsh  market  had  in  a  single  twelvemonth, 
during  the  decade  preceding  19 14,  invested  as 
much  as  $1,337,000,000  in  all  sorts  of  new  se- 
curities, home  and  foreign,  and  that  was  its 
highest  record.  In  the  whole  of  191 5  its  total 
subscriptions  to  new  securities  footed  up  $3,426,- 
000,000,  but  only  $76,000,000  of  that  enormous 
sum  was  placed  in  ordinary  investment  enter- 
prises. The  $3,350,000,000  balance  was  entirely 
made  up  of  British  war  loans,  or  of  loans  for  war 
purposes,  made  to  England's  allies  and  colonies. 
At  Berlin  and  Paris  the  story  was  the  same,  j 

This  concentration  almost  exclusively  on  home 
war  loans,  of  the  accruing  capital  heretofore  an- 
nually invested  in  other  securities,  provided  part 
of  the  capital  needed  for  the  war  loans,  but  by 
no  means  all.  The  war  loans  actually  placed  at 
home  by  England  in  the  first  twelve  months  of 
war  finance,  amounting  to  $4,750,000,000,  were 
at  least  twice  as  large  as  the  largest  sum  ever 
previously  invested  by  the  English  market,  dur- 
ing a  corresponding  period,  in  all  new  securities 
combined.  Germany's  $6,100,000,000  war  loans 
were  probably  five  or  six  times  as  large  as  her 
best  previous  record  in  absorbing  new  securities. 
From  what  source,  then,  were  the  remaining  cash 


6oK  FINANCING  THE  WAR 

subscriptions  drawn  ?  Some  of  them  represented 
proceeds  of  foreign  investments  (such  as  Amer- 
ican securities)  sold  back  to  the  coimtries  of  their 
origin.  A  very  large  contribution  came  from  de- 
posit-banks, savings-banks,  and  all  kinds  of 
fiduciary  institutions,  which  used  their  resources 
to  the  utmost  limit  in  taking  the  new  war  bonds 
into  their  assets. 
y  Much  of  the  money  must  have  come  from  use 
for  loan  subscriptions,  by  merchants  and  manu- 
facturers, of  business  profits  which  they  would 
usually  reinvest  in  their  own  enterprises.  Part 
came  undoubtedly  from  drawing  down  closely 
the  idle  balances  of  bank  depositors ;  part  (and  in 
Germany  a  very  substantial  part)  through  huge 
subscriptions  virtually  forced  by  government 
from  lucrative  war-munition  enterprises  like  the 
Krupps.  **No  new  enterprises  are  planned,'*  a 
Vienna  financial  correspondent  wrote  in  191 5, 
discussing  the  successful  war  loans  of  Germany 
and  Austria.  "No  journeys  are  imdertaken. 
Nobody  builds  himself  a  house  or  lays  out  a  park. ' ' 
All  of  the  money  once  devoted  to  such  pur- 
poses went,  imder  the  new  conditions,  to  the  war- 
loan  subscriptions.  Only  a  little  reflection  will 
be  needed  to  convince  the  average  man  of  the 
prodigious  available  ftmd  which  all  these  sources 
combined,  if  simultaneously  drawn  upon  in  a  rich 
and  thrifty  coimtry  and  imder  patriotic  impulses, 


SOURCE  OF  THE  WAR  FUNDS      6i 

would  provide  for  the  public  loans.  "Every 
citizen,"  one  of  the  highest  officers  of  the  British 
treasury  declared  to  the  House  of  Commons,  in  a 
debate  on  the  finances  a  month  ago,  "ought  to  be 
prepared  to  put  at  least  one-half  of  his  current 
income  at  the  disposal  of  the  state." 

He  might  do  this  through  subscribing  to  a 
loan,  or  through  paying  higher  taxes ;  as  to  which 
last-named  recourse  I  shall  presently  have  a 
word  to  say.  But  no  one,  at  all  familiar  with  a 
thrifty  commimity's  rate  of  private  income  and 
expenditure,  should  need  much  argument  to  con- 
vince him  of  how  enormous  a  war  fund  would  be 
provided  by  such  a  process.  It  was  after  an 
American  secretary  of  the  treasury,  in  1863,  had 
found  that  sufficient  war  loans  "could  not  be  dis- 
posed of  to  capitalists  without  serious  loss,"  that 
Jay  Cooke  and  his  army  of  canvassers,  peddling 
the  6  per  cents  on  commission,  like  book  agents, 
from  village  to  village,  placed  nearly  $400,000,- 
000  with  the  people  at  large.  Instances  such  as 
this  are  perhaps  the  simplest  answer  to  the  famil- 
iar prophecy  of  the  "economic  ruin  of  Europe." 

A  Europe  with  greatly  depleted  capital  and 
greatly  diminished  financial  power,  after  the  war 
is  over,  is  a  natural  supposition.  But  that  bel- 
ligerent Europe  is  to  be  "economically  ruined," 
in  the  sense  that  it  will  forever  lose  its  old-time 
power   in   production,    consumption,    home    and 


/ 


FINANCING  THE  WAR 


foreign  trade,  and  accumulation  of  wealth,  is 
an  absurd  supposition.  The  world  is  dealing, 
in  this  episode,  with  an  aggregate  reserve  of 
capital  which  is  at  least  as  much  greater  than 
that  of  the  Napoleonic  period,  for  instance,  as 
the  burden  of  war  expenditure  and  war  indebted- 
ness is  greater  than  what  it  was  in  the  decade  end- 
ing with  1815.  Economic  progress  throughout 
Europe  will  unquestionably  be  arrested,  prob- 
ably for  many  years;  with  what  accompanying 
phenomena,  it  is  not  easy  to  foreshadow;  and  any 
forecast  of  economic  conditions  in  any  or  all  of 
the  belligerent  states,  when  the  war  is  over  and 
the  long  process  of  financial  readjustment  begins, 
must  depend  in  large  measure  on  the  duration  of 
the  war  itself.  If  the  theory  were  correct  which 
was  at  first  so  widely  held,  that  Etuope  in  general 
or  Germany  in  particular  would  break  down  eco- 
nomically under  the  strain  of  military  expendi- 
ture, it  would  have  been  possible  to  imagine  one 
or  more  of  the  belligerent  countries  reduced  to  a 
state  of  collapse,  even  before  the  progress  of  the 
military  campaign  had  brought  the  conflict  to 
any  decisive  conclusion. 

Economic  exhaustion,  however,  is  a  formula 
considerably  more  difficult  to  reduce  to  terms  of 
concrete  phenomena  even  than  the  other  familiar 
theory  of  "government  bankruptcy."  One  would 
expect  to  define  the  nature  of  such  a  process  by 


"ECONOMIC  EXHAUSTION"        63 

reference  to  the  precedent  of  other  wars.  But 
military  history  throws  little  or  no  light  on  the 
question.  If  the  other  great  wars  of  modem 
times  prove  anything  in  this  regard,  it  would 
seem  to  be  that  belligerent  states  are  not  beaten 
purely  by  economic  exhaustion.  It  is  apparently 
the  teaching  of  such  history  that  governments 
can  fight  on,  often  against  seemingly  overwhelm- 
ing military  odds,  long  after  the  puzzle  has  become 
inscrutable,  where  they  could  raise  the  money  to 
carry  on  the  war,  how  they  could  maintain  their 
home  and  foreign  credit,  and  by  what  means  they 
could  continue  to  feed  both  their  non-combatant 
population  and  their  armies.  It  has  been  unfail- 
ingly characteristic  of  all  great  wars,  especially 
when  they  were  prolonged  beyond  previous  ex- 
pectation, that  even  financial  experts  have  pre- 
dicted financial  exhaustion,  probably  during  the 
war,  but  in  any  case  after  it,  as  an  inevitable  con- 
sequence. 

Macaulay  has  a  passage  much  in  point,  on  the 
public  debt  of  England.  At  the  end  of  the  war 
with  Louis  XIV,  that  debt,  he  said,  was  con- 
sidered, even  by  competent  thinkers,  "as  an  en- 
ctimbrance  that  would  permanently  cripple  the 
body  politic.**  Nevertheless,  "trade  flourished, 
wealth  increased,  the  nation  became  richer  and 
richer.'*  The  prediction  was  repeated,  with  the 
same  result,  during  England*s  other  wars  of  the 


64  FINANCING  THE  WAR 

eighteenth  century.  Hume  argued,  after  the  wars 
of  the  elder  Pitt,  that  *'all  the  revenues  north  of 
the  Trent  and  west  of  Reading  were  mortgaged"; 
Adam  Smith  warned  England  against  repeating 
the  hazardous  experiment.  Yet  the  public  debt, 
which  was  then  £140,000,000,  rose  to  £240,000,- 
000  at  the  end  of  the  American  War,  and  to  £800,- 
000,000  at  the  end  of  the  conflict  with  Napoleon. 
Had  an  enlightened  man  of  1792  been  told, 
Macaulay  continues,  that  "in  181 5  the  interest 
on  £800,000,000  would  be  duly  paid  to  the  day 
at  the  bank,  he  would  have  been  as  hard  of  be- 
lief as  if  he  had  been  told  that  the  government 
would  be  in  possession  of  the  lamp  of  Aladdin  or 
the  purse  of  Fortunatus."  But  the  subsequent 
economic  history  of  England  we  all  know. 

Macaulay  was  writing  primarily  concerning 
after  effects.  But  predictions  have  also  been  made 
early  in  such  conflicts,  and  seemingly  on  the  basis 
of  sound  reasoning,  to  the  effect  that  financial  ex- 
penditure on  the  scale  required  could  not  possibly 
last  beyond  a  stated  period.  This  was  freely  pre- 
dicted regarding  Japan  in  1904,  and  not  alone  by 
pro-Russian  financial  prophets.  The  country  was 
too  poor  to  keep  up  such  war  expenditure;  it  had 
no  adequate  reserve  of  accumulated  capital  at 
home;  the  time  must  come  when  its  government 
would  no  longer  be  able  to  raise  funds  abroad. 
The  Manchurian  war  was  cut  short  after  a  year 
and  a  half  of  fighting,  through  America's  medi- 


OLDER  PRECEDENT  6$ 

ation,  and  therefore  it  may  doubtless  still  be  ar- 
gued on  general  principles  that  another  year  or 
two  would  have  given  Japan  her  financial  coup  de 
grace.  But  the  evidence  which  we  do  possess  is 
embodied  in  the  facts  that  Japan  kept  on  raising 
public  war  loans  at  home,  chiefly  through  popular 
subscription,  and  that  her  series  of  foreign  loans 
were  placed  at  London  and  at  New  York  on 
progressively  more  favorable  terms,  after  the 
first  six  months  of  warfare. 

What  even  the  London  banking  commimity,  in 
the  disastrous  days  of  1797,  predicted  regarding 
England's  power  to  finance  a  continued  war,  did 
not  greatly  differ  from  what  the  New  York  bank- 
ing community  predicted  regarding  the  United 
States  in  1861,  when  the  government  at  Wash- 
ington found  difficulty  in  placing  a  loan  for  a 
few  millions  with  Wall  Street  bankers  at  7  per 
cent.  Yet  England  fought  for  the  seventeen  sub- 
sequent years,  and  raised  something  like  $2,000,- 
000,000  on  its  loans  to  pay  the  cost  of  it,  while 
the  United  States  raised  and  spent  $3,000,000,000 
purely  for  military  and  naval  operations  during 
the  four  years  after  Bull  Rim.  The  unsuspected 
sources  of  taxation  discovered  in  these  historic 
instances,  and  the  imimagined  reserves  of  private 
capital,  reached  by  ingenious  appeals  from  the 
government,  might  properly  make  the  financial 
prophet  cautious  during  the  present  war. 

The  same  considerations,  and  others  with  them, 


66  FINANCING  THE  WAR 

have  bearing  on  another  popular  theory  as  to 
this  huge  economic  burden.  This  takes  the  form 
of  prediction  that  beUigerent  Europe  will  **  re- 
pudiate" its  war  debt — a  word  understood  in  vari- 
ous ways  by  the  various  people  who  use  it.  But 
nothing  is  more  improbable  than  refusal  of  any 
great  European  government  after  the  war  to  pay 
interest  on  that  debt  or  the  principal  at  maturity. 
The  reason  is  that  the  present  belligerents  must 
borrow  heavily,  even  after  the  war,  to  meet  the 
continuing  public  deficit,  and  that  a  policy  of 
bad  faith  in  relation  to  the  war  loans  would  at  once 
destroy  the  public  credit.  The  erratic  President 
Andrew  Johnson,  in  his  annual  message  of  1868 
to  Congress,  described  it  as  *'just  and  equitable 
that  the  6  per  cent  interest  now  paid  by  the  gov- 
ernment should  be  applied  to  reduction  of  the 
principal,"  because  "holders  of  our  securities  have 
already  received  upon  their  bonds  a  larger  amount 
than  their  original  investment,  measured  by  a 
gold  standard."  The  overwhelming  indigna- 
tion with  which  Congress  instantly  voted  down 
this  fantastic  proposal  showed  that  they  not 
only  clearly  recognized  the  moral  character  of 
such  action,  but  foresaw  its  financial  conse- 
quences. 

Our  legislators  of  that  day  voted  down  also 
the  more  insidious  proposal  to  pay  interest  and 
principal  on  the  war  debt,  not  in  gold,  but  in  de- 


GERMAN  GOVERNMENT'S  POLICY    (yj 

predated  paper  money.  It  is  a  striking  fact, 
illustrative  of  the  conditions  possibly  foreshad- 
owed for  financial  Europe  after  peace,  that  on 
the  continental  money  markets  discussion  has 
been  heard  of  the  plan  to  pay  in  paper  money  the 
interest  on  war  loans,  so  far  as  the  bonds  are  held 
by  the  people  of  those  countries.  But  nobody 
has  suggested  payment  of  anything  but  gold  for 
interest  due  to  foreign  creditors.  Europe  is  well 
aware  how  far  it  must  rely,  after  the  war,  on  good 
financial  relations  with  such  powerful  neutral 
commimities  as  the  United  States. 

Some  interesting  light  has  been  thrown  on  this 
aspect  of  the  question  by  another  series  of  inci- 
dents in  the  financing  of  the  war.  I  have  thus 
far  spoken  only  of  the  recourse  to  public  loans  to 
meet  the  war  expenditure.  Six  months  after  the 
beginning  of  the  war,  Doctor  Karl  Helfferich,  im- 
perial finance  minister,  formally  announced  to 
the  German  Reichstag  that  the  Empire  would 
make  no  attempt  to  meet  the  cost  of  war  through 
new  taxes.  "We  do  not,"  he  declared,  ** desire  to 
increase  by  taxation  the  heavy  burden  which  war 
casts  on  our  people.'*  This  was  enunciating  a 
principle  practically  new  in  the  history  of  pro- 
tracted modem  wars.  It  amounted  to  asserting 
that  the  economic  interest  of  a  belligerent  state 
would  be  served  by  meeting  the  whole  war  expen- 
diture through  public  loans,  thereby  shifting  the 


68  FINANCING  THE  WAR 

entire  fiscal  burden  upon  the  shoulders  of  future 
generations. 

Doctor  Helfferich,  being  an  experienced  banker 
and  economist,  was  undoubtedly  aware  of  the 
dangerous  doctrine  to  which  he  was  committing 
the  German  Government.  Therefore,  in  a  subse- 
quent speech  to  the  Reichstag  during  August, 
191 5,  he  explained  that  ''we  owe  it  to  the  future 
of  our  people"  that  "the  future  development  of 
their  lives  shall  be  freed  from  the  appalling  bur- 
den caused  by  the  war.'*  How  was  this  appar- 
ently inconsistent  end  to  be  achieved  ?  Through 
the  fact,  so  announced  the  finance  minister,  that 
**  those  who  provoked  the  war,  and  not  we,  de- 
serve to  drag  through  the  centuries  to  come  the 
leaden  weight  of  these  thousands  of  millions." 
In  this  remark  were  embodied  two  strong  pre- 
possessions of  the  German  mind  in  the  earlier 
months  of  war — ^first,  that  England,  France,  and 
Russia  ** provoked"  the  war  which  Austria  made 
imminent  by  her  insolent  demands  on  Servia, 
the  averting  of  which  was  blocked  by  refusal 
of  official  Berlin  to  join  in  England's  proposals 
for  mediation,  and  which  Germany  precipitated 
by  her  high-handed  ultimatums  and  her  imlaw- 
f\il  invasion  of  Belgiimi;  second,  that  Germany, 
having  won  the  fight,  would  impose  on  her  antag- 
onists a  cash  indemnity  running  upward  of  $10,- 
000,000,000. 


THE  NEW  ENGLISH  TAXES         69 

Evidently  conscious  of  the  absurdity  underly- 
ing these  calm  assumptions — especially  with  the 
enemy  in  possession  of  Germany's  colonies,  with 
England  controlling  the  sea,  and  with  the  whole 
civilized  world  outside  of  Germany  in  agreement 
that  reparation  to  Belgitmi  was  the  sine  qua  non 
of  the  final  reckoning — the  minister  added,  in  a 
rather  obvious  anticlimax,  that  **the  dreadful 
financial  exhaustion  of  our  opponents  may  seem  to 
make  this  difficult  of  attainment."  But  at  all 
events,  so  far  as  concerned  the  plan  of  paying  for 
war  exclusively  by  borrowing,  *'the  force  of  cir- 
cumstances has  made  England  do  the  same."  A 
slight  increase  in  the  English  income  tax  and 
excise  duties  during  19 14  **  covered  only  5  per 
cent  of  the  English  war  bill."  A  subsequent  at- 
tempt to  increase  the  British  income  tax  had 
*' roused  such  lively  opposition  that  its  success  is 
more  than  dubious."  Therefore,  with  Germany, 
as  with  the  other  belligerent  Powers,  '*the  only 
method  seems  to  be  to  leave  the  settlement  of 
the  war  bill  to  the  conclusion  of  peace  and  to  the 
period  after  peace  has  been  concluded." 

But  the  German  Government  was  presently  to 
learn  that  it  had  misjudged  the  temper  of  Eng- 
land actually  at  war  and  confronted  with  rising 
taxes,  as  completely  as  it  had  misjudged  the 
temper  of  England  on  the  verge  of  war  and  con- 
fronted with  Irish  insurrection.     When  the  first 


70  FINANCING  THE  WAR 

*'war  budget"  of  19 14  had,  as  the  German 
finance  minister  asserted,  introduced  only  slight 
changes  in  the  tax  bill,  the  British  taxpayers  them- 
selves insisted  that  their  own  immediate  burden 
be  increased.  In  September,  1915,  the  new 
chancellor  of  the  exchequer  annotmced  a  very 
extraordinary  series  of  new  imposts.  The  income 
tax,  already  exceptionally  high  before  the  war 
began  (owing  to  the  government's  extensive  plans 
for  social  and  industrial  betterment),  was  raised 
X  nearly  one-half  beyond  its  previous  figure.  The 
tax  on  moderate  incomes  from  investments  rose  to 
l^}i  per  cent  of  the  income — a,  wholly  unprece- 
dented height,  and  nearly  three  times  what  it 
had  been  before  the  war — ^with  a  graduated 
*' super-tax"  on  large  incomes  which  raised  the 
total  exaction  from  incomes  of  $500,000  or  over 
to  no  less  than  34  per  cent.  Excise  or  import 
taxes  ranging  from  30  to  100  per  cent  were  im- 
posed on  a  nimiber  of  articles  in  constant  use. 
Rates  for  postage,  telephone,  and  telegraph  mes- 
X  sages  were  heavily  increased.  Out  of  all  profits 
from  manufacture  of  war  material,  the  govern- 
ment was  to  take  one-half  in  taxes.  Roughly 
speaking,  the  total  annual  revenue  from  taxation, 
which  was  $800,000,000  in  the  twelvemonth  be- 
fore the  war  began,  was  estimated  now  at  very 
nearly  $1,500,000,000.  The  absolutely  new  requi- 
sitions for  the  coming  year  footed  up  $510,700,000. 


A  HUGE  WAR  REVENUE  71   0 

No  such  increase  in  a  single  season  had  ever  been 
witnessed  in  the  history  of  taxation. 

Even  so,  only  24  per  cent  of  the  annual  British 
war  expenditure  was  being  paid  from  taxes, 
whereas  the  common  estimate  of  history  had  been 
that  40  per  cent  of  England's  costs  in  the  Na- 
poleonic War  had  been  thus  met.  Early  in  19 16, 
however,  another  and  even  more  startling  budget 
of  new  taxation  was  presented  to  Parliament  by 
the  exchequer.  The  income  tax  went  higher 
still;  incomes  of  $10,000  a  year,  for  instance, 
paying  25  per  cent  to  the  government.  Other 
taxation  then  imposed  brought  the  simi  total  of 
annual  revenue  of  all  descriptions  up  to  $2,500,- 
000,000,  as  against  $1,130,000,000  in  the  twelve- 
month ending  with  March,  191 5,  and  $990,000,000 
for  the  similar  period  ending  with  March,  1914. 
The  percentage  of  increase  was  not  so  great  as  the  0 
rise  in  the  United  States  Government's  revenue 
from  $41,400,000  in  1861  to  $322,000,000  in  1865; 
but  our  Federal  taxation  when  the  Civil  War  began 
was  negligible,  whereas  England's  national  tax  rev- 
enue in  the  year  before  the  war  was  the  largest 
of  any  nation  in  the  world.  It  was  now  possible 
for  the  British  ministry  to  say  that  something  like 
27  per  cent  of  the  annual  war  expenditiire  was  be- 
ing paid  from  taxes,  and  that  new  revenue  from 
that  source  was  already  providing  in  full  for  in- 
terest on  the  debt  and  a  future  sinking  fimd, 


72  FINANCING  THE  WAR 

whereas  Germany  was  paying  interest  on  its 
later  war  loans  with  the  proceeds  of  the  earlier 
ones. 

It  should  be  remarked  that  this  notable  achieve- 
ment was  the  achievement  of  England  only. 
France  made  little  or  no  attempt  to  meet  the  cost 
of  war  from  taxes.  Russia  had  decreased  rather 
than  increased  public  revenue  through  her  em- 
bargo on  the  state-controlled  sale  of  spirits.  But 
the  English  budget  and  the  remarkable  una- 
nimity of  approval  with  which  the  taxpayers 
received  it  threw  at  least  considerable  light  on 
the  theory  of  "financial  exhaustion."  Even  as 
regards  the  policy  of  Germany  (which  responded 
to  England's  new  annoimcements  by  a  not  very 
significant  new  taxation  yielding  $120,000,000 
per  annum),  it  is  fair  to  keep  in  mind  that  in 
1 9 13,  when  increasing  her  standing  army,  pre- 
sumably in  preparation  for  the  war  of  1914,  the 
Empire  had  imposed  what  is  usually  the  last  word 
in  taxation — a  heavy  percentage  tax  on  property 
of  every  sort,  to  be  paid  in  three  instalments  as 
a  ''contribution  to  imperial  defense.'* 

In  view  of  what  England  actually  did,  it  may 
safely  be  assumed  that  the  power  to  raise  money 
for  the  war  by  other  means  than  loans  had  by  no 
means  approached  exhaustion.  Indeed,  a  very 
striking  fact  of  the  European*  situation  was  that 
the  very  familiar  recourse  of  former  wars — the 


UNTRIED  EXPEDIENTS  73 

issue  of  paper  money  directly  by  the  government 
and  the  use  of  it  to  meet  the  government's  ex- 
penses, was  practically  rejected  by  all  of  the  bel- 
ligerents. The  expedient  of  "government  notes'* 
not  redeemable  in  coin  was  employed  on  an  ex- 
tensive scale  in  our  Civil  War;  the  economic 
meaning  of  them  is  that  the  government  pays  its 
current  bills  with  its  own  promises  to  pay  at  an 
indefinite  future  date,  forcing  its  creditors  at 
home  to  accept  such  promissory  notes  as  money. 
Under  this  contrivance  a  government  may  at 
least  appropriate  the  services  and  property  of  its 
citizens,  as  bankrupt  revolutionary  France  did 
after  1789,  without  the  necessity  of  procuring 
actual  money  for  the  purpose.  The  incidental 
and  very  formidable  evils  arising  from  such  in- 
flation of  the  currency  with  irredeemable  and  im- 
secured  paper  are  well  known.  Prices  of  com- 
modities rise  to  heights  entirely  out  of  touch  with 
those  of  the  world  at  large,  and  in  the  end  the 
currency  thus  created  may  become  virtually 
worthless  on  the  markets,  like  the  assignats  of 
France,  the  continental  currency  of  our  own 
Revolutionary  War,  and  the  paper  money  of  the 
Confederate  States.  These  very  familiar  con- 
siderations easily  explain  why  the  European 
belligerents  of  this  war  should  not  have  employed 
the  recourse.  But  the  fact,  nevertheless,  remains 
that  the  recourse  might  have  been  employed  and 


74  FINANCING  THE  WAR 

that  it  would  have  served  to  carry  on  the  war. 
Therefore  the  absence  of  attempts  to  revive  the 
old  experiment  of  fiat  money  proved  at  least 
that  economic  exhaustion  was  not  yet  at  hand. 


CHAPTER  V 
FINANCIAL  AMERICA  AND  THE  WAR 

OF  all  the  surprises  which  have  marked  the 
financial  history  of  the  war,  none  was  more 
complete  than  what  happened  with  the 
United  States.  After  twelve  months,  in  which, 
with  increasing  rapidity,  the  worid  had  become 
politically  and  financially  disorganized  by  the 
epoch-making  conflict,  this  coimtry  unmistakably 
reached,  in  its  relations  with  all  other  coimtries, 
a  pinnacle  of  economic  power  and  prestige  never 
previously  attained  by  it,  and  never  imagined, 
in  the  form  it  actually  assumed,  imtil  long  after 
the  outbreak  of  the  war. 

The  historian  of  the  future  will  probably  say 
that  this  was  the  quite  inevitable  result  of  the  war 
itself.  The  six  greatest  European  nations,  includ- 
ing all  of  this  coimtry's  richest  and  most  aggres- 
sive commercial  rivals,  were  engaged  in  wasting 
their  own  resources  and  crippling  the  resources  of 
one  another.  In  one  European  country  of  high 
financial  rank,  the  banks  had  been  seized  by  the 
invading  enemy  and  their  resources  virtually 
confiscated.     From  Paris  $900,000,000  gold  and 

75 


76  FINANCIAL  AMERICA 

silver,  the  reserve  of  the  Bank  of  France,  had 
been  hurriedly  removed  to  a  distant  port  to  escape 
impending  capture.  Bombs  were  dropped  from 
air-ships  in  the  neighborhood  of  the  Bank  of 
England.  Berlin  was  cut  off,  commercially  and 
financially,  from  the  rest  of  the  financial  world. 
What  result  more  natural,  under  such  circum- 
stances, than  that  money  of  foreign  countries, 
seeking  a  surely  guarded  resting-place,  should 
pour  into  the  banking  institutions  of  the  greatest 
neutral  state  ?  What  other  outcome  was  to  be 
expected  than  that  the  foreign  trade  of  this  pow- 
erful neutral  nation  should  expand  to  previously 
unimagined  proportions  ? 

Such,  indeed,  is  to-day  admitted  by  the  whole 
financial  world — now  that  we  know  what  actually 
happened — to  have  been  the  inevitable  logic  of 
the  situation.  Yet  there  were  several  highly  im- 
portant contributory  causes  which  could  hardly 
have  been  predicted  in  advance,  and  which  cer- 
tainly were  not  predicted.  Furthermore,  this  sud- 
den rise  to  overshadowing  economic  power  and 
prestige  is  precisely  what  the  high  financial  ex- 
perts, at  the  beginning  of  the  war,  had  declared 
could  not  possibly  happen.  The  United  States 
was  believed  to  be  in  great  measure  economically 
dependent  on  Europe.  Two  years  before,  it  had 
been  declared  on  well-known  banking  authority 
that  even  in  normal  times  our  annual  dues  to 


OUR  INDEBTEDNESS  TO  EUROPE     77 

Europe — ^for  interest  and  dividends  on  American 
securities  held  by  foreign  investors,  for  payment  of 
freights  on  foreign  ships,  and  for  remittances  cov- 
ering expenditure  by  Americans  living  or  travel- 
ling abroad — ^were  so  enormous  as  to  exceed  by 
more  than  $500,000,000  our  normal  excess  of 
merchandise  exports  over  imports.  The  difference 
had  to  be  met  through  Europe's  investment  of 
capital  in  this  coimtry.  Europe,  the  inference 
proceeded,  could  if  it  chose,  even  in  an  ordinary 
year,  have  called  for  payment  of  this  $500,000,000 
debit  balance  in  gold.  Probably  the  estimate 
much  exaggerated  the  actual  situation.  Still,  it 
was  based  on  facts  which  did  exist. 

It  is  true  that,  during  one  remarkable  episode 
of  our  financial  history,  fifteen  years  before  this 
war.  New  York  had  indulged  for  a  few  months  in 
the  dream  of  becoming  shortly  the  independent 
financial  centre  of  the  world — **  displacing  Lon- 
don" was  at  the  time  the  favorite  way  of  putting 
it.  The  course  of  events  which  led  to  that  prema- 
ture expectation  provides  a  curious  parallel  of  cir- 
cumstance (though  on  a  far  smaller  scale  of  opera- 
tion) with  that  of  191 5.  England,  in  1901,  had  y 
been  for  a  year  at  war  with  the  Transvaal  Repub- 
lic, London's  financial  markets  were  gravely  dis- 
turbed; even  that  little  conflict  was  costing  the 
British  exchequer  a  million  dollars  per  day.  The 
United  States,  in  the  half-dozen  years  after  the 


/, 


78  FINANCIAL  AMERICA 

y  panic  of  1893,  had  been  economizing  and  saving;  it 
had  put  its  currency  in  order  and  had  established 
the  gold  standard  beyond  dispute.  It  had  raised 
the  two  largest  grain  crops  in  its  history  at  the  very 
time  when  Europe's  harvests  failed;  had  thereby 
increased  its  exports  to  a  figure  in  those  days  ut- 
terly amazing,  and  had  witnessed  such  financial 
and  industrial  prosperity  at  home  as  promised 
imbounded  possibilities.  When,  imder  all  these 
circumstances,  continental  Europe  began  to  clamor 
at  the  capture  of  its  markets  by  our  manufacturers, 
and  when  this  was  followed  by  the  subscription  of 
our  bankers  to  $208,000,000  of  the  British  war 
loans — the  first  ever  sold  by  the  exchequer  to 
foreign  subscribers — ^it  was  not  strange  that  pre- 
diction of  New  York's  coming  supremacy  in  the 
financial  world  should  have  been  the  watchword. 
Reviewing  that  episode,  after  the  later  inci- 
dents in  our  economic  history  during  the  Euro- 
pean War,  there  is  much  in  the  nature  of  economic 
coincidence.  But  whatever,  in  the  longer  sequel, 
is  to  be  the  outcome  of  our  country's  rise  to  inter- 
national power  after  19 14,  the  predictions  of  1901 
turned  out  very  soon  to  be  illusions.  A  few  ex- 
citing months,  and  our  own  most  ambitious  finan- 
ciers admitted  reluctantly  that  at  the  height  of 
our  economic  prestige  we  had  really  been  using 
European  capital,  which  came  to  New  York  of  its 
own  accord,   because  of  America's  temporarily 


BEFORE  THE  WAR  79 

great  prosperity.  Long  before  1907,  Wall  Street 
was  once  rtiore  openly  borrowing  by  the  hundreds 
of  millions,  and  in  every  European  money  market. 

France  and  England  had  to  help  us  out  of  that 
year's  financial  pitfalls.  In  the  ensuing  half-dozen 
years  our  financial  markets  continued  to  draw  on 
Europe's  capital,  at  a  rate  which  suggested  that 
such  help  was  an  immediate  necessity.  The 
spectacular  incident  in  our  markets  of  1909  was 
the  effort  to  induce  the  Paris  Bourse  to  take  over 
part  of  the  capital  stock  of  our  largest  joint-stock 
company,  the  United  States  Steel  Corporation. 
In  1 9 10  our  most  powerful  railways  sold  to  the 
Paris  market  more  than  $50,000,000  of  new  se- 
curities. Between  that  year  and  19 14  the  reluc- 
tance of  Europe  to  support  our  markets  (for 
reasons  of  its  own,  already  explained)  caused  great 
financial  depression  in  this  coimtry.  Even  a 
borrower  in  such  high  credit  as  the  city  of  New 
York,  hesitating  to  press  new  bond  issues  on  the 
American  market,  placed  no  less  than  $100,000,- 
000  of  its  short-term  obligations  with  European 
bankers,  and  had  to  pay  a  high  interest  rate  to 
get  them  placed.  We  shall  hear  of  these  New 
York  City  obligations  again  in  the  course  of  our 
present  narrative;  the  great  bulk  of  them  hap- 
pened, unluckily,  to  fall  due  in  the  autimm  of 
1914. 

Such  was  the  position  which,  at  the  outbreak  of 


V 


8o  FINANCIAL  AMERICA 

the  war,  American  finance  seemed  to  occupy  with 
relation  to  Europe.  It  was  surely  no  matter  for 
astonishment — even  when  the  logic  of  the  situ- 
ation might  have  been  plainly  reasoned  out  on 
the  lines  suggested  at  the  opening  of  this  chapter 
— that  the  gloomiest  forecasts  of  all,  regarding 
the  American  outlook,  should  have  come  from 
conservative  and  experienced  financiers.  The 
most  that  even  Wall  Street  ventured  to  predict 
of  a  hopeful  nature,  in  the  first  two  or  three 
months  of  the  European  War,  was  that  American 
exporters  might  capture  the  South  American  and 
Asiatiq  markets  lost  by  Europe.  The  most  that 
financial  London  had  to  say,  by  way  of  encourage- 
ment, was  that  when  the  war  should  end  the  United 
States  might  be  brought,  through  its  previous 
neutrality,  to  a  position  of  high  financial  power. 
It  must  now  be  our  task  to  answer  the  question, 
why  every  one  of  these  high  experts  was  wrong  in 
his  prediction,  to  see  just  what  actually  happened, 
and  to  determine  why  it  happened. 

What  happened  first  was  of  a  character  to  con- 
firm the  most  unfavorable  judgment.  The  New 
York  Stock  Exchange  closed  its  doors  on  Friday, 
July  31,  the  day  of  London's  closing.  There  was 
strong  opposition  to  such  action,  on  the  stock  ex- 
change itself,  but  it  was  silenced  by  evidence, 
presented  to  the  officers  of  the  exchange,  that 
selling  orders  from  Europe,  already  placed  with 


CLOSING  THE  STOCK  EXCHANGE    8i 

bankers  and  brokers  for  execution  as  soon  as  the 
exchange  should  open  Friday  morning,  were  of  a 
magnitude  and  character  such  as  to  threaten  the 
gravest  consequences.  Houses  through  which 
Europe's  investing  commimities  commonly  made 
their  purchases  or  sales  on  the  New  York  Stock 
Exchange  reported  that  every  market  in  the  world 
seemed  to  be  making  ready  for  the  sale  to  New 
York  at  once  of  all  the  American  securities  that 
they  could  dispose  of.  It  must  be  remembered 
that,  with  war  now  recognized  as  inevitable  but 
with  no  protective  financial  measures  yet  adopted, 
there  was  a  double  motive  for  such  sales  at  al- 
most any  sacrifice.  First,  not  a  banking-house  in 
Europe  was  sure  of  its  own  continued  solvency; 
therefore  the  instinct  which  always  governs  the 
financial  mind  in  time  of  panic — to  convert  in- 
vestments instantly  into  cash — operated  with  un- 
precedented violence  in  this  greatest  of  all  finan- 
cial panics.  But,  second,  the  European  banking 
commimity's  knowledge  of  the  prodigious  coming 
demand  for  capital  by  the  belligerent  govern- 
ments urged  immediate  preparation  of  the  neces- 
sary free  resources. 

Closing  of  all  the  European  exchanges  had  put 
a  stop  to  liquidation  on  those  markets.  Had  the 
New  York  Stock  Exchange  reopened  on  July  31, 
it  would  have  been  the  only  great  market  in  the 
world  available  for  such  sales;    and  foreign  in- 


82  FINANCIAL  AMERICA 

vestors  held  at  the  time,  as  subsequent  expert  in- 
vestigation pretty  clearly  proved,  hardly  less  than 
$4,000,000,000  of  American  securities.  Of  the 
great  mass  of  foreign  selling  orders,  awaiting  exe- 
cution at  the  New  York  opening  of  the  31st,  a 
very  large  number  explicitly  provided  for  ac- 
ceptance of  bids  as  much  as  15  or  20  per  cent 
under  the  previous  day's  market.  Some  fixed  no 
limit  whatever  on  the  price.  When  it  is  further 
stated  that  prices  of  such  securities  had  already 
fallen  10  to  20  per  cent  in  the  few  preceding  days, 
and  that  the  New  York  banks  had  loans  out- 
standing in  the  htindreds  of  millions,  based  on 
pledge  of  these  securities  at  their  previous  valu- 
ations, the  reason  why  the  board  of  governors 
closed  the  New  York  Stock  Exchange  is  evident. 
The  fact  that  after  the  exchange  had  reopened, 
five  months  later,  this  European  selling  was  re- 
sumed on  an  extensive  scale,  yet  without  seriously 
disturbing  the  course  of  prices,  has  occasionally 
raised  the  question  whether  New  York  might  not 
safely  have  left  its  official  market  open  after 
July  30,  purchased  the  American  securities  thrown 
over  by  Europe,  and  thereby  gained  at  once  the 
international  prestige  which  was  actually  achieved 
only  after  long  delay.  No  one  can  absolutely 
prove  a  negative.  Theoretically,  at  least,  the 
thing  might  have  been  done.  But  it  would  un- 
questionably have  been  done  at  the  cost  of  far- 


THE  NEXT  TURN  83 

reaching  insolvency.  The  New  York  Stock  Ex- 
change at  the  end  of  July  confronted  world-wide 
panic.  When  it  reopened  in  December,  Europe 
as  well  as  America  had  applied  the  necessary  pro- 
tective meastires;  panic,  at  least,  was  over.  The 
foreign  selling  of  our  stocks  and  bonds  during 
191 5  was  orderly  and  deliberate;  only  as  much 
was  sold  from  day  to  day  as  the  market  would 
take  without  break  in  prices.  The  banks,  as  we 
shall  presently  see,  were  able  then  to  facilitate 
the  process.  But  the  immediate  course  of  events, 
after  July  30,  19 14,  showed  how  ill-prepared  they 
were  for  such  service  at  the  time.  Even  supposing 
New  York  to  have  surmounted  the  "war  panic'* 
of  midsimimer,  19 14,  without  shutting  the  doors 
of  its  stock  exchange,  the  failures  which  must 
have  followed  could  scarcely  have  been  limited 
to  Wall  Street  brokers.  If  deposit  banks  had 
also  closed  their  doors  in  the  frantic  rush  of  stock- 
market  liquidation,  the  shock  would  have  reached 
the  bank-depositing  public  and  the  domain  of 
general  industry. 

It  was,  in  fact,  immediately  evident  that  the 
crisis  had  by  no  means  been  averted  by  the  clos- 
ing of  the  stock  exchange.  Nobody  knew  what 
would  be  the  next  turn  of  international  finance. 
^^^Nobody  knew  whether  panic  would  not  break  out 
among  bank  depositors.  Whatever  protection  the 
closing  of  the  stock  exchange  may  have  given  in 


84  FINANCIAL  AMERICA 

other  directions,  the  banks  at  any  rate  had  lost 
through  it  the  opportunity  of  selHng  their  own 
securities,  and  thereby  fortifying  their  cash  re- 
sources. With  the  situation  thus  obscure  and 
menacing,  the  banks  of  New  York,  followed  by 
those  in  other  American  cities,  promptly  adopted 

X  two  emergency  expedients.  One  had  never  been 
employed  except  in  time  of  panic;  the  other  had 
never  previously  been  employed  at  all. 

y  The  first  was  the  issue  of  what  were  called 
''clearing-house  loan  certificates."  This  expedi- 
ent (originally  designed  solely  to  enable  one  or 
more  embarrassed  banks  to*  protect  their  own 
cash  reserve)  permitted  such  institutions  to  use 
interest-bearing  due-bills  instead  of  cash,  when 
paying  for  checks  drawn  against  them,  deposited 
with  other  banks  for  collection,  and  presented 
for  payment  by  such  other  banks.  But  the  plan 
never  worked  within  those  limits.  Since  every 
bank  in  a  given  clearing-house  had  an  equal 
right  to  **take  out  clearing-house  certificates," 
and  since  every  bank  was  confronted  with  a 
possible  "run,"  the  process  soon  came  to  mean 
that  all  the  banks  of  a  given  city  would  suspend 
cash  payments  to  one  another.  This  in  tiun  in- 
variably caused  suspension  of  cash  payments  to 
depositors,  or  at  least  restriction  of  their  cash 
withdrawals  to  small  sums.  The  consequence  had 
been,  in  each  of  our  greater  panics,  that  employers 


CLEARING-HOUSE  CERTIFICATES     85 

of  labor  could  not  draw  from  their  bank-accounts 
the  cash  required  to  meet  their  weekly  pay-rolls. 
In  the  panics  of  1907  and  1893,  currency  was 
bought  and  sold  on  Wall  Street  at  a  premium  as 
high  as  4  per  cent,  the  $104  asked  by  the  brokers 
for  $100  actual  money  being  paid  in  certified 
bank  checks.  During  the  panic  of  1907,  there 
were  outstanding,  in  the  various  cities  of  the 
United  States  no  less  than  $227,114,000  clearing- 
house loan  certificates;  they  remained  in  use  at 
New  York  during  twenty-two  successive  weeks, 
and  the  **premiimi  on  currency"  lasted  two  full 
months.  In  19 14,  the  maximimi  amount  at  any 
time  outstanding  was  $195,754,000. 

The  suspension  of  cash  payments  at  the 
banks,  and  the  currency  premiimi  at  New  York, 
would  presumably  have  occurred  again  in  Au- 
gust, 1 9 14,  but  for  the  second  and  novel  expedient 
adopted  by  the  banks.  Such  conditions  might, 
indeed,  have  lasted  longer  even  than  in  1907; 
for  in  that  year  the  crisis  was  relieved  by  immedi- 
ate import  of  almost  $100,000,000  gold  from 
Europe,  whereas  the  five  months  after  war  broke 
out  in  1 9 14  were  marked,  as  we  shall  see,  by  ex- 
port of  an  exactly  equal  sirni.  •  Simultaneously, 
however,  with  the  recourse  to  clearing-house  loan 
certificates  the  so-called  "Aldrich-Vreeland  Law" 
of  1908  was  put  into  operation. 

That  law  passed  Congress  a  few  months  after 


86  FINANCIAL  AMERICA 


the  panic  of  1907;  its  purpose  was  to  establish 
machinery  for  rapid  increase  of  the  currency  in 
panic  time,  and  thereby  to  avert  such  hoarding  of 
money,  drawn  from  bank  reserves  and  other  or- 
dinary channels,  as  locked  up  from  circulation, 
toward  the  end  of  1907,  no  less  than  $296,000,000. 
A  properly  elastic  currency-issue  system,  such  as 
exists  to-day,  would  have  served  the  purpose; 
prospective  money  hoarders  would  have  got  noth- 
ing but  new  bank-notes.  But  long  discussion  and 
debate  were  necessary  before  a  law  with  the 
requisite  scope  and  detail  could  be  framed,  and 
the  ''emergency-currency  law"  of  1908  was  en- 
acted to  bridge  over  the  intervening  period.  The 
older  law  permitted  national  banks  to  issue 
notes  only  on  pledge  of  United  States  bonds  with 
the  government;  this  was  a  slow  and  greatly  re- 
+■  stricted  process.  The  "Aldrich-Vreeland  Act** 
authorized  instantaneous  issue,  within  carefully 
prescribed  limitations,  of  currency  based  on  the 
pledge  of  other  assets  of  the  banks,  such  as  ap- 
proved notes  of  mercantile  borrowers.  In  the 
six  years  up  to  August,  19 14,  no  bank  had  applied 
for  such  **  emergency  ctirrency";  but  the  notes 
were  engraved,  held  by  the  government,  and  kept 
ready  for  immediate  delivery.  They  were  put 
out  without  delay  in  19 14.  By  the  3d  of  August 
$46,000,000  of  them  were  in  the  hands  of  New 
York  banks.    Depositors  who  asked  for  cash  were 


"  ALDRICH-VREELAND  LAW"        87 


^ 


paid  in  this  new  currency  (which  in  form  was 
hardly  distinguishable  from  the  old-time  bank- 
notes), and  the  banks  retained  the  gold  and  legal- 
tender  currency  in  their  reserves. 

This  machinery,  then,  provided  without  any 
fresh  legislation  that  immediate  relief  which 
Europe  obtained  only  through  new  and  hastily 
contrived  expedients.  It  is  a  highly  interesting  X 
fact  that  English  bankers  were  at  work  on  plans 
for  a  similar  special  currency  at  the  very  moment 
when  the  war  broke  ontA  It  was  to  have  provided 
for  additional  note  issues  in  time  of  stress,  secured 
one-third  by  gold  and  two-thirds  by  negotiable 
securities.  The  private  London  banks  and  the 
British  Government  had  favored  it;  the  Bank  of 
England  opposed  it.  *'The  bankers,"  one  of  the 
committee  subsequently  wrote,  when  describing 
the  August  bank  panic  at  London,  "imder^ood 
that  the  opposition  either  was  or  would  be  with- 
drawn ;  but  it  was  too  late."  The  alternative  plan 
of  "currency  notes"  had  to  be  adopted. 

The  results  of  the  application  in  this  country, 
of  the  statute  of  1908,  were  most  important.  But 
so  violent  was  the  shock  of  panic  that  they  were 
slow  in  operation.  In  the  three  weeks  between 
the  end  of  July  and  the  middle  of  August,  19 14, 
actual  money  in  the  reserves  of  New  York  banks 
decreased  $83,000,000;  nearly  all  of  the  decrease 
being  gold.     Under  the  old  national  bank  law 


88  FINANCIAL  AMERICA 

then  in  force,  city  banks  were  required  to  keep  on 
hand  in  "lawful  money''  (a  technical  term  which 
did  not  apply  to  the  new  **Aldrich-Vreeland 
notes")  25  per  cent  of  the  amount  of  their  de- 
posits. On  July  25  they  held  $25,127,000  more 
than  that  requirement;  on  August  15  the  actual 
deficit  below  the  25  per  cent  was  $47,992,000. 
Nevertheless,  it  soon  appeared  that  no  induce- 
ment for  continued  hoarding  existed  any  longer, 
when  banks  were  freely  providing  customers  with 
the  currency  issued  under  the  law  of  1908. 

So  much  had  been  accomplished;  yet  after 
all  it  had  only  served  to  check  one  symptom  of 
the  panic.  There  was  little  in  the  situation, 
during  the  three  or  four  months  which  immediately 
followed  the  outbreak  of  the  war,  to  foreshadow 
any  other  favorable  change.  It  was  during  those 
few  months  that  prediction  as  to  the  influence  of 
the  European  War  on  this  cotmtry's  economic  posi- 
tion was  most  hopeless.  Between  July  and  No- 
vember, 1 9 14,  the  outlook  for  American  prosper- 
ity seemed,  even  to  trained  and  practical  financial 
observers,  to  be  altogether  dark. 

There  was  abundant  reason  for  misgiving. 
Quite  apart  from  the  disturbing  possibility  that 
Europe  would  call  for  instant  repayment  of  the 
enormous  sum  of  capital  invested  in  the  United 
States — an  achievement  as  impossible  for  our  mar- 
ket as  a  bank's  immediate  payment  in  cash  of  all 


IN  THE  FIRST  MONTHS  OF  WAR    89 

the  deposits  on  its  books — the  entire  framework  of 
finance,  commerce,  and  industry  had  been  shat- 
tered by  this  mighty  blow.  During  the  first  few 
weeks  of  war,  the  country's  maritime  export  trade 
came  almost  to  a  halt ;  ships  with  cargoes  already 
on  board  were  afraid  to  risk  the  chance  of  seizure 
by  cruisers  of  the  belligerent  powers.  When 
England  had  chased  the  hostile  cruisers  from  the 
sea  and  the  ocean  highway  was  reopened,  our 
lucrative  trade  with  Germany  had  disappeared. 
In  the  five  last  months  of  19 13  we  had  exported 
$186,000,000  worth  of  merchandise  to  that  coun- 
try. In  the  same  five  months  of  19 14  we  shipped 
only  $2,200,000.  This  country's  total  export 
trade  in  August  decreased  $77,000,000  from  the 
year  preceding;  for  September  and  October  com- 
bined, the  decrease  was  $138,000,000.  This  was 
no  favorable  omen  for  the  payment  of  our  ac- 
cruing foreign  dues,  as  usual,  in  merchandise. 

Not  only,  in  fact,  were  shipping  facilities  sud- 
denly and  heavily  reduced,  but  the  shock  to  inter- 
national credit  had  instantly  impaired  the  buying 
power  of  neutral  coimtries,  while  the  question  what 
belligerent  Europe  could  purchase  from  Arqierica 
was  entirely  obscure.  It  is  true  that  the  wheat 
market  is  traditionally  stimulated  by  war,  and 
that  the  wheat  crop  just  reaching  harvest  in  the 
United  States,  when  war  began,  was  the  largest 
which  we  had  ever  harvested.    In  that  branch  of 


90  FINANCIAL  AMERICA 

export  trade  we  shall  encounter  highly  interesting 
developments  later  in  our  narrative.  But  the 
cotton-growing  industry,  though  that  crop  also 
produced  in  19 14  the  second  largest  harvest  of 
our  history,  found  itself  for  that  very  reason  in  a 
dangerous  predicament. 

More  than  half  of  our  yearly  crop  of  cotton  is 
sold  and  shipped  to  Europe,  the  value  of  that  ex- 
port having  risen  as  high  as  $600,000,000.  But 
Germany  was  our  cotton  trade's  second  largest 
foreign  customer;  her  market  was  cut  off,  while 
the  textile  industry  in  the  rest  of  Europe,  along 
with  other  manufacturing  activities,  was  para- 
lyzed by  the  shock  of  war.  In  September,  Octo- 
ber, and  November,  normally  the  months  of  large 
shipments  from  the  newly  grown  cotton  crop,  the 
country's  cotton  export  footed  up  in  19 14  less  by 
$218,000,000  than  in  the  corresponding  months  of 
the  year  before.  The  prospect  seemed  to  be  that 
possibly  one- third  of  our  crop  of  19 14  would  be 
left  on  the  planters'  hands.  Now  the  South  not 
only  depends  on  its  sales  of  cotton  for  its  income 
of  the  season,  but  it  had  spent  large  simis,  often 
of  borrowed  money,  for  wages,  rent,  and  materials. 
An  outcry  arose  at  once  that  the  South  was  facing 
ruin.  Excited  congressmen  proposed  that  the 
national  treasury  lend  $500,000,000  to  the  plant- 
ers; that  currency  be  issued  on  the  security  of 
cotton;   that  the  government  guarantee  a  profit- 


COMMERCIAL  DIFFICULTIES        91 

able  price  for  cotton,  which  was  then  falling  rapidly 
on  the  market.  Efforts  were  made  to  start  a 
nation-wide  canvass  for  the  purchase  of  a  bale 
of  cotton  apiece  by  charitable  citizens,  and  in  the 
end  a  fund  of  $135,000,000  was  conditionally 
pledged  by  banks  throughout  the  country  to  lend 
against  cotton  and  save  the  South  from  ruin. 

As  was  shown  by  the  event,  this  cotton-market 
panic  was  imreasonably  exaggerated;  the  South 
shared  fully  in  the  country*s  later  war-time  pros- 
perity. Still,  it  was  one  discouraging  sign  of  the 
early  auttimn  of  19 14.  While  this  was  going 
on,  our  manufacturing  industry  was  beginning  to 
discover  that  many  hitherto  indispensable  raw 
materials,  such  as  dyestuffs  and  chemicals,  were 
apparently  cut  off  from  access  to  otir  markets. 
Production  slackened  rapidly  in  the  steel  and  cot- 
ton-spinning trades.  Bank  checks  drawn  in  the 
whole  United  States  during  August  decreased  19 
per  cent  from  the  year  before;  in  September 
and  October  the  decrease  was  2$  per  cent.  This 
pointed  to  such  shrinkage  in  actual  business  ac- 
tivities as  had  been  familiar  only  in  periods  of 
severe  depression. 

With  foreign  trade  and  home  industry  thus  de- 
ranged, there  remained  the  question  of  our  in- 
debtedness to  Europe.  The  protective  measures 
already  taken  in  the  banking  and  currency  situa- 
tion dealt  solely  with  the  financial  crisis  at  home. 


92  FINANCIAL  AMERICA 

The  closing  of  the  stock  exchange  merely  pro- 
tected us,  temporarily,  from  Europe's  sales  of 
American  securities.  Neither  guarded  against  the 
sudden  and  urgent  recall  of  capital  in  other  forms. 
Our  markets  were  heavily  in  debt  to  Europe,  not 
only  through  American  stocks  and  bonds  held  by 
foreign  investors  but  through  loans  coming  to 
maturity  almost  daily.  England,  our  largest 
creditor,  was  calling  for  instant  payment,  and  we 
could  not  blame  her  for  it.  Her  own  necessities 
were  urgent.  Loans  due  to  her  from  the  Euro- 
pean Continent  were  non-collectible  because  of 
the  war;  loans  due  from  nearly  all  other  neutral 
countries  were  non-collectible  because  of  the  mora- 
toriimis.  There  was  no  war  and  no  moratorium 
at  New  York,  and  London  called  on  the  New  York 
market  to  pay  what  it  owed. 

It  seemed  inconceivable  that  New  York  could 
meet  the  call.  In  the  last  week  of  July  $42,- 
000,000  gold  was  taken  for  export  to  Europe;  no 
outgo  on  such  a  scale  could  continue  very  long 
without  eventually  exhausting  the  available  gold 
reserve  of  both  banks  and  government.  New 
York's  **par  of  exchange"  with  London  is  $4.86>^, 
which  means  that  an  English  gold  sovereign  is 
intrinsically  worth  that  amoimt  in  American  cur- 
rency. The  usual  cost  of  freight  and  insurance, 
with  the  temporary  loss  of  interest  on  the  money, 
is  such  that  the  rate  of  exchange  may  rise,  say  to 


THE  HIGH  EXCHANGE  RATES      93 

$4.88>^  or  $4.89  in  the  pound  sterling,  before  it 
will  be  profitable  to  send  gold  from  New  York  to 
London.  Ordinarily  the  rate  can  go  no  higher, 
since  at  that  figure  the  gold  may  be  obtained  and 
shipped.  But  during  the  five  last  days  of  July, 
when  financial  London  was  falling  into  panic, 
New  York  exchange  rose  successively  to  $4.91^, 
to  $4.95,  to  $5,  to  $5.50,  and,  finally,  on  August 
4 — the  day  of  Great  Britain's  ultimatum  to  Ger- 
many— ^to  $7  in  the  pound  sterling. 

No  rate  an3rwhere  near  to  this  had  ever  been 
reached  in  the  history  of  the  New  York  market. 
Since  the  rate  of  exchange  thus  touched  was  im- 
possible with  gold  shipped  freely  to  London,  to 
pay  the  balance  of  international  indebtedness 
against  New  York,  and  since  $4.86^^  to  the  pound 
sterling  was  the  intrinsic  parity  of  exchange,  the 
$7  rate  meant,  theoretically,  that  the  American 
currency  was  depreciated  4H  per  cent  on  the 
foreign  market.  We  shall  encounter  this  measure- 
ment of  currency  depreciation  again  in  the  later 
chapters  of  the  economic  history  of  the  war.  Of 
this  particular  episode,  it  is  enough  to  say  that 
the  depreciation  was  quite  artificial,  for  two  rea- 
sons. A  treasure  ship  could  not  be  trusted  to 
make  the  passage  from  America  to  England; 
there  was  therefore  no  limit  to  the  price  in  dollars 
which  might  have  to  be  paid  by  a  New  York 
banker  whose  obligations  in  London  were  falling 


94  FINANCIAL  AMERICA 

due,  for  a  draft  redeemable  at  London  in  pounds 
sterling.  But  it  was  also  an  artificial  depreciation 
because  the  treasury  continued  freely  to  redeem 
the  American  currency  in  gold. 

But,  on  the  other  hand,  it  soon  began  to  ap- 
pear, even  after  the  British  fleet  had  driven  Ger- 
many's ships  from  the  sea,  that  the  New  York 
banks  were  not  disposed  to  give  up  gold  for  ex- 
port. The  loss  of  the  $42,000,000  gold  for  that 
purpose,  at  the  end  of  July,  had  shaken  the 
financial  community's  nerves.  If,  in  response  to 
London's  calling  in  of  its  foreign  credits,  shipment 
of  gold  had  continued  at  that  weekly  rate,  the 
$308,900,000  gold  in  the  vaults  of  New  York's 
banks  on  August  15  would  have  been  exhausted 
in  less  than  two  months.  A  run  on  the  treasury 
reserve,  to  get  gold  in  exchange  for  government 
legal-tender  currency,  would  apparently  have  fol- 
lowed. 

Furthermore,  the  New  York  bankers  pointed 
to  the  fact  that  the  moratoritmi  on  debts,  pro- 
claimed by  the  British  Government,  applied  to 
indebtedness  due  by  English  bankers  to  American 
creditors.  Why,  therefore,  should  gold  be  sent 
to  London  to  pay  what  New  York  bankers  owed 
in  that  city  ?  On  the  face  of  things,  the  American 
money  market  seemed  to  be  on  the  verge  of  join- 
ing Europe  in  her  confession  of  financial  helpless- 
ness.    New  York  had  almost  established,  auto- 


PROBLEM  OF  NEW  YORK  95 

matically  and  without  governmental  sanction,  a 
moratorium  of  its  own  on  foreign  obligations,  and 
among  those  obligations  were  the  short-term  bonds 
of  the  city  of  New  York,  falling  due  and  payable 
in  Europe  before  the  end  of  19 14. 


CHAPTER  VI 

THE  NEW  YORK  MARKET'S  ACTION 

THE  decision  which  the  New  York  banks 
were  now  compelled  to  make  was  of  crit- 
ical importance;  but  the  true  nature  of 
the  crisis  was  imperfectly  imderstood.  In  the 
highest  financial  circles,  opinion  divided  sharply. 
Should  New  York,  under  the  plausible  pretexts  of 
the  moratoriimi  on  London's  own  external  debts 
and  of  the  danger  threatening  this  country's  gold 
supply  if  we  met  the  instant  claims  of  foreign  cred- 
itors, postpone  payment  of  its  own  maturing  for- 
eign indebtedness  ?  Or  should  such  payment  be 
made  on  the  spot,  regardless  of  consequences? 
There  was  much  to  say  for  either  alternative.  Prob- 
ably, during  the  first  few  weeks  of  war,  the  pre- 
vailing judgment,  even  among  experienced  bank- 
ers, favored  the  first-named  policy.  Much  that  is 
clear  to-day,  in  the  light  of  subsequent  events, 
was  altogether  obscure  in  August,  19 14.  Ideas 
regarding  both  present  and  future  were  still  col- 
ored deeply  by  the  conviction  that  the  basis  of 
credit  had  been  absolutely  broken  down;  that 
the   catastrophe   involved  in   Europe's   poHtical 

96 


LONDON'S  EXPECTATIONS  97 

and  economic  crisis  was  imminent,  world-wide, 
and  imavoidable;  that  unless  peremptory  pro- 
tective measures  were  adopted,  reversion  to  prim- 
itive methods  of  international  exchange  would 
force  every  debtor  country  to  the  wall  when 
creditor  coimtries  grasped  at  its  resources.  The 
United  States  was  one  of  these  debtor  coimtries. 
Why,  then,  did  not  its  only  rational  policy  lie  in 
imitating  belligerent  Europe  and  suspending  pay- 
ment of  international  debts  ? 

What  would  have  been  the  outcome  in  the 
coimtry's  immediate  economic  future,  if  that 
policy  had  been  adopted,  it  is  somewhat  difficult 
to  say.  We  have  evidence  of  what  financial 
Europe  thought.  Writing  when  the  actual  de- 
cision was  still  hanging  in  the  balance,  a  well- 
known  London  financial  expert,  later  appointed 
special  advis.er  to  the  British  exchequer,  declared 
that  the  existing  crisis  *'was  the  chance  of  a  cen- 
tury for  New  York."  A  neutral  market  which 
had  promptly  paid  its  own  international  bills  in 
gold,  and  had  granted  credit  to  other  hard-pressed 
debtor  countries,  **  would  have  stepped  straight 
onto  London's  financial  throne  and  set  London  a 
very  difficult  task  to  regain  it  after  the  war  was 
over.'*  But  America  * 'feared  to  use  its  gold,  and 
held  on  to  it  as  tightly  as  it  cotdd,  fearful  of  in- 
ternal trouble  and  a  nm  on  its  banks  if  too  much 
of  the  metal  went  abroad."    The  result  was  **the 


98    NEW  YORK  MARKET'S  ACTION 

depreciation  of  the  American  dollar  as  compared 
with  the  pound  sterling.**  **It  was  the  chance  of 
a  century;  but  New  York  could  not  take  it.'* 

A  month  or  two  later,  this  London  expert 
would  hardly  have  thus  described  the  policy  of 
financial  New  York.  Four  months  later,  he  might 
have  been  compelled  to  draw  a  different  con- 
clusion as  to  the  possibility  of  New  York's  dis- 
placing London.  But  what  the  London  critic 
obviously  meant  was  that  if  the  American  mar- 
ket had  surrendered,  had  followed  the  rest  of  the 
neutral  world  in  suspending  international  pay- 
ments, it  would  thereby  have  publicly  proclaimed, 
at  the  very  outset,  its  inability  to  stand  alone,  and 
would  have  joined  the  long  list  of  banking  and  in- 
vesting centres  in  whose  custody  foreign  capital 
could  not  be  placed  with  any  certainty  of  getting 
it  promptly  back  again  when  needed,  or  of  re- 
covering it  at  all,  except  at  a  rate  of  exchange 
which  would  not  recover  its  original  face  value. 
We  shall  presently  see  what  moral  effect  was  pro- 
duced on  foreign  depositors,  both  by  the  action 
of  Great  Britain  in  proclaiming  a  moratoriimi  and 
by  the  action  of  the  American  community  in 
rejecting  any  form  of  that  expedient.  For  the 
policy  of  arbitrary  debt  suspension  was  rejected 
— not  by  edict,  nor  even  by  general  consultation 
and  consideration,  but  by  bold  and  courageous 
grappling  with  the  first  concrete  case. 


THE  NEW  YORK  CITY  BONDS      99 

It  was  fortunate  that  this  case  presented  a 
clean-cut  issue.  At  London,  there  were  about  to 
fall  due  £13,494,000  in  notes  of  New  York  City; 
at  Paris,  61,500,000  francs.  Payment  in  gold  at 
those  cities,  on  the  stipulated  date,  was  nomi- 
nated in  the  bond.  Two  or  three  New  York  bank- 
ers accepted  this  situation  as  the  crucial  test,  and 
called  on  the  banks  of  the  city  to  provide  for  the 
payment.  Their  task  was  not  easy.  No  one 
institution  could  provide  single-handed  the  $80,- 
000,000  gold  required  for  export;  if  done  at  all, 
the  work  must  be  done  by  joint  action  of  all  the 
largest  banking  institutions.  So  great  was  the 
hesitancy  of  responsible  bank  officials  that  the 
only  argimient  which  eventually  broke  down  op- 
position in  some  important  quarters  was  the  blunt 
declaration  that  **if  the  credit  of  New  York  City 
goes  by  the  board,  all  the  rest  might  as  well  go 
with  it." 

But  the  credit  of  New  York  City  did  not  go  by 
the  board.  The  New  York  banks  subscribed  to 
a  new  $100,000,000  bond  issue  of  the  city,  each 
bank  agreeing  not  only  to  pay  the  stipulated  price 
for  its  allotments,  but  to  provide,  in  the  ratio  of 
its  individual  subscription  and  in  gold  or  in  bills 
of  exchange  convertible  into  gold  at  London,  its 
share  of  the  $80,000,000  European  obligation, 
r^th  a  view  to  avoiding  the  still-existent  risks  of 
ocean  transit,  the  Bank  of  England  established  a 


loo    NEW  YORK  MARKET'S  ACTION 

K  branch  at  the  Canadian  Government  depository, 
Ottawa,  agreeing  to  accept  gold  payments  at  that 
point  as  made  in  London.  To  that  destination, 
something  like  $35,000,000  gold  was  exported  from 
New  York  as  the  city's  European  loans  came,  one 
after  another,  to  maturity. 

As  always  happens  in  such  circumstances,  the 
smoothness  with  which  this  large  transaction  was 
completed  paved  the  way  for  further  concerted 
action  on  the  problem  of  international  payments. 
The  *'New  York  City  loan  pool"  went  into  opera- 
tion in  the  middle  of  September.  By  the  close  of 
the  same  month  arrangements  were  under  way, 
on  a  very  much  larger  scale,  for  shipment  of  gold 
to  meet  the  remaining  balance  of  international 
indebtedness  against  us.  This  was  a  far  less 
simple  operation  than  the  financing  of  New  York 
City's  debt.  Since  in  this  instance  it  was  impossi- 
ble to  measure  the  full  scope  of  the  foreign  claims 
beforehand,  it  would  clearly  have  been  imprudent 
to  begin  by  trusting  to  unregulated  export  of 
gold,  whose  increasing  magnitude  might,  in  the 
prevalent  uncertainty,  have  ended  by  throwing 
the  subscribing  bankers  into  panic. 

The  course  pursued,  therefore,  was  the  inviting 
of  banks  throughout  the  United  States  to  sub- 
scribe (as  nearly  as  possible  in  the  ratio  of  their 
cash  resources)  the  sum  of  $100,000,000  gold; 
from  which  fund  the  gold  required  for  export, 


GOLD  PAYMENT  MAINTAINiai)    toi 

in  order  to  adjust  the  unfavorable  balance  of  ex- 
change, should  be  drawn  and  shipped  to  Ottawa 
for  account  of  London.  This  remarkable  opera- 
tion was  directed  by  a  committee  of  bank  officials 
with  nation-wide  reputations,  who  were  to  call  up 
the  subscriptions  of  gold  pro  rata,  as  fast  as  actual 
export  needs  developed.  Beginning  at  the  open- 
ing of  October  with  an  actual  shipment  of  $io,- 
000,000  to  Ottawa,  this  imdertaking  made  clear 
to  all  the  world  the  meaning  of  the  newly  adopted 
attitude  of  American  financiers. 

Its  moral  effect  on  international  opinion  was 
very  great.  It  is  an  axiom  of  banking  that  the 
way  to  stop  a  **run"  is  to  give  public  and  tangible 
evidence  of  readiness  to  pay.  The  bank  depositor 
who  rushes  to  the  paying-teller's  window,  insist- 
ing that  his  balance  be  paid  at  once  in  cash,  and 
who  finds  that  official  with  a  pile  of  gold  or  cur- 
rency at  his  elbow,  cheerfully  handing  out  the 
cash  to  applicants,  is  extremely  apt  not  alone  to 
change  his  mind  about  withdrawing  his  deposit, 
but  to  pass  along  to  the  receiving-teller's  window 
with  a  new  deposit.  That  very  himian  instinct, 
entirely  familiar  in  the  case  of  himible  individuals, 
displays  itself  as  invariably  in  the  larger  field 
of  banking  operations;  with  capitalists,  commu- 
nities, and  nations.  The  action  of  the  **  bankers* 
pool"  was  closely  watched,  in  Europe  as  in  New 
York.     When  it  was  seen  that  $8,000,000  to  $10,- 


i02    NEW  YQRK  MARKET'S  ACTION 

000,000  gold  per  week  was  quietly  being  drawn 
from  the  banks  and  shipped  to  Ottawa,  exactly 
that  result  ensued  which  occurs  when  the  paying- 
teller  promptly  meets  all  demands  of  bank  de- 
positors in  a  "run."  In  this  larger  instance  of 
what  had  seemed  to  be  a  run  by  Europe  on  the 
gold  reserve  of  the  United  States,  the  American 
bankers*  systematic  shipment  of  gold  to  the  Bank 
of  England's  branch  in  Canada — the  total  gold  ex- 
port from  this  country  between  August  i  and 
December  31  being  no  less  than  $104,900,000 — ^had 
the  visible  effect,  first  of  reducing  Europe's  de- 
mands for  immediate  payment  of  our  interna- 
tional indebtedness;  then,  in  due  course,  of  draw- 
ing capital  from  abroad  to  the  United  States. 
Under  these  various  influences  New  York  ex- 
change on  London  had  returned,  by  the  last  week 
of  October,  19 14,  to  the  rate  of  normal  times. 

But  New  York  had  not  yet  been  disentangled 
from  the  complications  in  which  the  whole  finan- 
cial world  had  become  involved  when  war  began. 
American  bank  reserves  and  American  currency 
were  still  imder  artificial  influences.  Clearing- 
house loan  certificates  were  only  gradually  aban- 
doned ;  new  issues  of  the  sort  were  made  by  New 
York  banks  as  late  as  the  middle  of  October,  and 
at  that  same  date  the  **Aldrich-Vreeland"  bank- 
note issues,  confessedly  an  emergency  expedient, 
were  almost  at  their  maximum.    What  was  possi- 


POSITION  IN  OCTOBER  103 

bly  even  more  to  the  point  in  its  bearing  on  our 
international  financial  prestige,  the  New  York 
Stock  Exchange  was  still  closed  for  business. 
Foreign  capital,  whether  from  belHgerent  or  neu- 
tral markets,  might  doubtless  now  be  deposited 
in  American  banks,  with  confidence  that  it  would 
be  returned  on  demand  in  gold.  But  conversion 
into  cash  of  foreign  capital  invested  in  American 
stocks  and  bonds,  or  conversion  of  cash  into  such 
securities,  continued  to  be  impracticable.  We  are  ^ 
now  to  see  in  what  way  these  three  impediments — 
the  emergency  bank-reserve  money,  the  emergency 
paper  currency,  and  the  emergency  embargo  on 
sales  of  stocks  and  bonds — ^were  next  to  be  re- 
moved. 

The  clearing-house  loan  certificates  disap- 
peared automatically,  as  they  have  always  done 
when  panic  has  disappeared,  hoarding  of  cur- 
rency has  ceased,  and  cash  in  the  bank  reserves 
has  risen  to  normal  proportions.  Before  the  end 
of  October,  notwithstanding  the  large  export  of 
gold  from  New  York  since  July,  the  stun  total  of 
gold  and  United  States  notes  in  New  York  bank 
reserves  (which  had  at  one  time  fallen  $61,000,- 
000  below  the  figure  of  August  i)  was  within  two 
millions  of  the  August  figure,  and  the  **  surplus 
reserve"  was  restored,  for  the  first  time  since  that 
date;  by  November  28,  all  of  the  loan  certificates 
that  the  New  York  banks  had  issued  were  re- 


^I04    NEW  YORK  MARKET'S  ACTION 

deemed  and  cancelled;  by  December  14,  none  of 
them  was  left  outstanding  in  the  United  States. 
The  ** emergency  bank-notes'*  of  the  law  of 
1908 — of  which  $384,500,000  were  in  circulation 
in  the  later  autumn  of  19 14 — ^were  subject  to  a 
tax  which  increased  gradually  as  time  went  on 
and  the  notes  were  not  redeemed.  The  tax  had 
not  yet  arrested  the  employment  of  this  currency ; 
for  the  banks  were  still  surrendering  gold  for  ex- 
port, financial  judgment  as  to  what  would  happen 
next  was  doubtftd  and  suspicious,  and  no  one  was 
disposed  to  give  up  so  serviceable  a  safeguard 
against  another  shock  to  public  confidence.  But 
at  the  moment  when  the  financial  ship  was  be- 
ginning in  many  other  ways  to  right  itself,  an 
achievement  of  the  first  importance  settled  the 
question  of  the  currency.  It  is  fair  to  describe 
what  happened  as  a  remarkable  coincidence — a 
windfall  of  the  most  timely  and  extraordinary 
good  fortune  to  the  United  States. 
Y  Long  before  war  in  Europe  had  been  discussed 

in  America  as  a  present  possibility — as  far  back 
as  the  later  months  of  19 13 — the  Wilson  adminis- 
tration had  devoted  all  its  energies  to  effecting 
the  passage  of  a  proper  currency  and  banking  law. 
I  shall  not  attempt  to  describe  the  numerous  and 
complex  provisions  of  this  statute,  or  to  narrate 
the  somewhat  confused  phases  through  which 
the  act,  very  imperfect  as  originally  framed,  was 


THE  FEDERAL  RESERVE  LAW     105 

at  last  amended  into  shape  insuring  a  scientific 
modem  system.  The  essential  aspects  of  the  law 
which  received  the  President's  signature  in  De- 
cember, 1 9 13,  were  these:  Instead  of  leaving  every 
bank  to  use  or  misuse  its  own  reserve  of  cash  in  a 
time  of  stress  or  panic,  it  established  twelve  cen- 
tral institutions  in  as  many  districts  of  the  coim- 
try,  each  ** reserve  bank"  to  hold  in  its  own  vaults 
the  bulk  of  the  cash  reserves  of  banks  within  its 
district. 

Thus  held,  the  "gold  and  lawful  money"  could 
still  be  counted  as  part  of  the  reserve  of  every 
*' member  bank."  In  return  for  such  surrender  of 
cash  reserves,  each  central  institution  was  bound 
to  rediscoimt  on  request  loans  already  carried 
by  member  banks;  in  other  words,  to  lend  to  a 
member  bank,  at  a  fixed  rate  of  interest  and  on 
security  of  the  merchants*  paper  which  was  the 
basis  of  the  member  bank's  own  loan,  the  money 
originally  advanced  to  mercantile  borrowers  by 
that  member  bank.  This  process  meant  that  when 
requirements  for  credit  on  the  part  of  their  busi- 
ness clientage  were  greater  than  the  individual 
banks  could  meet,  in  their  existing  position  of 
reserves,  part  of  the  burden  might  be  shifted  to 
the  reserve  bank  of  the  district.  The  loan  or 
'* rediscoimt,"  thus  obtained  by  a  member  bank 
from  its  central  institution,  was  to  take  the  form 
of  a  credit  balance  in  the  reserve  bank.     That 


io6    NEW  YORK  MARKET'S  ACTION 

credit  balance  the  member  bank  might  count  as 
part  of  its  own  reserve;  or  the  member  bank,  if 
it  so  desired,  might  draw  on  its  balance,  receiving 
the  new  currency  known  as  Federal  Reserve  notes. 
These  notes,  though  not  themselves  available  for 
bank  reserves,  were  available  for  all  the  uses,  in 
hand-to-hand  money  circulation,  belonging  to  the 
national  bank-notes  which  they  were  intended  to 
replace. 

The  nature  of  the  notes  and  bills  rediscounted, 
and  the  term  for  which  they  were  to  run,  were 
carefully  prescribed  in  the  statute;  the  total 
amount  rediscotmted  for  any  member  bank  was 
not,  under  ordinary  circumstances,  to  exceed  one- 
half  of  its  capital  and  surplus,  and  was  never  to 
exceed  the  whole  of  those  two  fimds.  Against  all 
deposits  credited  to  member  banks,  through  re- 
discount of  their  loans  or  otherwise,  the  Federal 
Reserve  Bank  must  maintain  in  its  own  vaults 
3  5  per  cent  in  specie  or  government  notes.  Against 
all  note  circulation  issued  by  a  Federal  Reserve 
Bank  to  a  member  bank,  and  by  it  paid  out  to 
the  public;  the  reserve  bank  must  maintain  a 
reserve  of  40  per  cent  in  gold.  Finally,  in  order 
that  the  twelve  reserve  banks  of  the  twelve  al- 
lotted districts  should  be  held  to  a  harmonious 
general  policy,  and  in  order  to  insure  their  united 
action  in  a  financial  crisis,  a  so-called  Federal 
Reserve  Board  of  seven  members — two  of  them 


A  **  PSYCHOLOGICAL  MOMENT  "     107 

government  officials  and  five  named  separately 
by  the  President  of  the  United  States — was  cre- 
ated, with  wide  supervisory  and  restrictive  powers 
over  the  entire  system. 

Such,  in  its  general  outlines,  is  the  machinery 
of  the  banking  and  currency  system  enacted  at 
the  close  of  19 13.  No  one  imagined,  when  the 
law  was  passed,  that  urgent  necessity  for  be- 
ginning its  operation  was  so  near  at  hand.  Its 
actual  introduction  was  in  fact  accomplished 
rather  slowly.  It  was  three  or  four  months  be- 
fore the  prescribed  committee  had  arranged  the 
twelve  districts  and  the  location  of  the  twelve 
reserve  banks.  Not  imtil  one  week  after  the  out- 
break of  the  war  was  the  Federal  Reserve  Board 
itself  completed,  and  it  was  several  months  more 
before  the  new  reserve  banks  were  actually  or- 
ganized. At  length,  on  November  16,  the  new 
banking  and  currency  system  went  into  force. 
Its  inauguration  was  followed  by  retirement  of 
the  $384,500,000  emergency  bank-note  currency, 
which  was  taken  up  so  rapidly,  through  issues  of 
the  new  Federal  Reserve  notes,  that  before  the 
middle  of  191 5  it  had  wholly  ceased  to  exist. 

It  will  not  have  escaped  the  reader's  notice  that 
the  new  banking  system  entered  on  the  scene  at 
what  may  be  termed  the  exact  psychological  mo- 
ment. New  York  had  publicly  restmied  payment 
of  its  maturing  foreign  debts  in  gold.     Foreign 


io8    NEW  YORK  MARKET'S  ACTION 

exchange,  whose  rates  had  for  three  months  run 
so  abnormally  against  New  York,  was  back  to 
the  normal  level.  ''Loan  certificates'*  at  the 
banks  were  nearly  all  called  in;  "surplus  re- 
serves" at  those  institutions  were  restored.  Now 
came  that  thoroughgoing  reform  of  our  banking 
and  currency  system,  without  which,  financial 
Europe  had  for  years  declared,  the  United  States 
could  not  aspire  to  high  international  prestige, 
and  with  which  it  was  equally  predicted  we  should 
win  the  full  financial  confidence  of  the  outside 
world.  All  this  series  of  propitious  events  had 
occurred  in  that  notable  month,  November,  19 14. 
To  remove  all  doubt  and  misgiving  which  might 
still  exist,  on  the  part  of  other  markets,  there  re- 
mained only  one  achievement — the  reopening  of 
the  New  York  Stock  Exchange  to  unrestricted 
transactions  by  the  home  and  foreign  investor. 

None  of  the  previous  efforts  to  restore  normal 
conditions — ^not  even  the  decision  to  export  gold 
in  payment  of  our  foreign  debts — was  surroimded 
with  quite  so  much  imcertainty  as  this.  Of  all 
the  gloomy  predictions  made  during  August  in 
regard  to  the  war's  effect  on  American  finance, 
the  surest  and  most  logical  seemed  to  be  that 
Europe  at  the  first  opportunity  would  sell  its  three 
or  four  thousand  millions  of  American  securi- 
ties at  the  best  price  obtainable.  It  had  mani- 
festly been  doing  that  very  thing  when  the  stock 


WALL  STREET  AND  EUROPE      109 

exchanges  closed  their  doors  on  July  30,  before  the 
prodigious  war  expenditure  had  begun.  Now, 
however,  with  19 14  drawing  to  a  close,  Great  Brit- 
ain was  preparing  to  float  a  war  loan  of  no  less 
than  $1,750,000,000,  Germany  was  about  to  bor- 
row $1,000,000,000,  and  the  other  belligerents  had 
similar  plans  on  foot.  War  loans  of  even  greater 
magnitude  were  immediately  impending.  No 
such  requisition  on  Ein*ope's  capital  had  been  wit- 
nessed in  history.  The  inevitable  sequel  seemed 
to  be  that  all  investment  holdings  of  the  European 
public,  which  could  be  ttuned  into  cash  on  other 
than  Eiu*opean  markets,  would  be  sold  at  once  to 
raise  the  fimds  for  subscription  to  the  war  loans. 
But  if  this  seemingly  certain  policy  were  to  be 
pursued,  what  could  avert  a  25  or  50  per  cent  de- 
cline in  prices  on  the  New  York  Stock  Exchange, 
with  the  complete  derangement  of  the  credit  sys- 
tem which  had  apparently  been  imminent  when 
the  stock  exchange  closed  its  doors  ? 

Such  was  even  now  the  reasoning  of  the  stock 
exchange  committee.  It  was  not,  however,  now 
accepted  unqualifiedly  by  the  financial  commu- 
nity as  a  whole.  What  was  suspected  at  the  time, 
and  what  has  been  proved  conclusively  by  subse- 
■J  quent  events,  was  this:  The  enormous  sales  of 
our  stocks  by  Europe  in  July  had  been  an  incident 
of  panic,  and  panic  was  now  averted.  Even  if 
foreign  investors  were  to  sell,  they  would  now  sell 


NEW  YORK  MARKET'S  ACTION 

cautiously  and  deliberately,  with  a  view  to  getting 
Y  the  highest  price  obtainable.  Finally  (and  this 
suggestion,  though  at  the  time  considered  very- 
daring,  turned  out  to  be  entirely  correct)  the  im- 
mense financial  prestige  gained  by  the  United 
States,  in  refusing  to  join  the  world-wide  rush 
for  a  moratoritim  on  debts,  must  so  far  have  con- 
vinced the  foreign  capitalist  of  the  soundness  of 
the  American  situation  that  he  would  hold  to 
what  he  had  of  them  already  and,  if  he  sold  at 
all,  would  sell  reluctantly  and  slowly. 

The  stock  exchange  proceeded  cautiously;  but 
it  was  not  left  wholly  in  the  dark.  No  market  in 
which  a  large  nimiber  of  people  really  wish  to 
trade  can  be  absolutely  suppressed,  and  after  the 
stock  exchange  had  closed  down  on  July  30,  it 
was  not  long  before  a  group  of  individuals  met  on 
the  sidewalk  in  the  neighborhood  of  Wall  Street, 
to  experiment  in  buying  and  selling  what  was  no 
longer  bought  or  sold  on  the  stock  exchange.  It 
was  an  irregular  and  tmrestricted  market ;  stock- 
exchange  houses  were  forbidden  to  deal  on  it,  and 
both  banks  and  stock-exchange  officials  did  their 
utmost  to  checkmate  its  activities.  Nevertheless, 
the  market  in  the  street  survived  and  flourished. 
Made  up  at  first,  perhaps,  only  of  wagers  by 
venturesome  gamblers  on  the  probable  value  of 
securities,  this  so-called  "outlaw  market'*  pres- 
ently showed  signs  that  bona-fide  buying  and  sell- 


THE  "STREET  MARKET''         iii 

ing  orders  were  being  executed  in  it.  It  must  be 
remembered  that  the  pressure  for  some  avenue  to 
trade  in  investment  securities  was  very  great. 
Estates  must  be  closed  out ;  holders  of  stocks  and 
bonds  have  other  uses  for  the  money;  people  with 
an  idle  fund  in  bank  wish  to  invest  it,  without 
waiting  for  reopening  of  a  stock  exchange. 

By  autumn,  even  the  banking  offices  were  keep- 
ing on  file  the  daily  printed  circulars  quoting 
prices  of  the  *' outlaw  market."  During  the 
early  autimm,  prices  on  that  market  went  below 
even  the  closing  prices  of  the  final  panic  day, 
July  30.  By  the  middle  of  October,  important 
stocks  were  selling  10  per  cent  or  more  tmder  that 
day's  quotations.  Then,  along  with  the  nimierous 
favoring  developments  in  the  financial  situation 
generally,  an  unmistakable  buying  movement 
showed  itself.  It  grew  more  active;  within  six 
or  seven  weeks  the  "outlaw  market "  had  recovered 
most  of  the  losses  previously  reported,  and  prices 
were  again  pretty  nearly  at  the  end-of-July  level. 

These  things  had  happened  in  the  face  of  the 
most  vigorous  opposition  by  stock-exchange  offi- 
cials. But  meantime  the  stock  exchange  itself  had 
not  been  wholly  idle.  In  the  third  week  of  Septem- 
ber permission  was  given  for  members  to  buy  or 
sell  bonds  to  one  another;  though  all  such  sales  had 
first  to  receive  the  approval  of  a  special  commit- 
tee, and  no  sales  were  permitted  below  a  level  of 


i 


112    NEW  YORK  MARKET'S  ACTION 

prices  fixed  arbitrarily  a  trifle  under  the  closing 
quotations  of  July  30.  In  the  middle  of  October, 
similar  opportunity  was  granted  to  deal  in  a 
limited  list  of  high-grade  stocks.  All  this  was  done 
without  the  formal  resumption  of  business  on  the 
stock  exchange.  Finally,  on  November  28,  the 
doors  of  the  exchange — closed  during  four  con- 
secutive months,  whereas  never  before  in  Wall 
Street  history  had  such  suspension  of  business 
lasted  longer  than  ten  days — ^were  officially  re- 
opened. 

The  date  itself  was  interesting.  It  was  six 
weeks  after  the  surplus  in  New  York  bank  re- 
serves had  been  restored;  not  quite  two  weeks 
after  the  new  banking  system  had  gone  into 
operation;  almost  exactly  a  week  after  exchange 
on  London  had  returned  to  normal  parity,  with 
consequent  cessation  of  gold  exports.  It  was 
also,  by  an  appropriate  coincidence,  that  very 
day  on  which  the  last  of  New  York's  clearing- 
house loan  certificates  was  cancelled.  Even  now 
the  stock-exchange  officers  proceeded  with  some 
misgiving.  At  first,  open  trading  was  permitted 
in  bonds  alone;  a  list  of  "minimum  prices,'*  close 
to  actual  prices  of  July  30,  was  published,  no 
sales  were  allowed  below  that  minimimi,  and 
speculative  purchases  or  sales  were  rigorously 
forbidden — only  transactions  involving  immediate 
cash  payment  being  admitted.    It  was  also  stipu- 


STOCK  EXCHANGE  REOPENS      113 

lated  that  every  sale  made  on  foreign  account 
should  be  so  stated  to  the  stock  exchange  com- 
mittee. These  extreme  precautions  showed  that 
apprehension  of  a  **2o  per  cent  all-aroimd  de- 
cline" had  not  yet  been  removed.  But  prices 
quoted,  on  this  resumption  of  official  trading, 
gave  no  indication  of  a  downward  tendency. 
They  did  not  even  stay  at  the  arbitrary  ''mini- 
mimis";  instead,  a  gradual  advance  ensued. 

After  two  weeks,  therefore,  stocks  as  well  as 
bonds  were  admitted  to  this  limited  open  trad- 
ing, though  with  the  same  restrictions.  The  re- 
sult surprised  all  Wall  Street;  for  prices,  instead 
of  hesitating  aroimd  the  "minimtims,"  began  at 
once  a  vigorous  advance,  and  before  the  month 
was  ended  had  moved  up  in  many  instances  8 
per  cent  or  more.  This  advance  continued  into 
the  new  year,  1915.  On  April  i  all  special  re- 
strictions of  whatever  sort  on  stock-exchange 
trading  were  removed.  Home  and  foreign  hold- 
ers of  American  securities  were  invited  to  sell 
what  they  should  see  fit  on  the  New  York  market. 

This  announcement  was  the  final  expression  of 
financial  America's  full  confidence  in  its  own 
position.  It  removed  from  the  New  York  mar- 
ket the  last  protective  expedient  of  the  war  panic 
of  1 9 14.  Considered  along  with  the  notable  in- 
cidents which  had  preceded  the  stock-exchange 
resimiption,  and  with  the  further  fact  that  no 


114    NEW  YORK  MARKET'S  ACTION 

investment  market  in  the  world,  outside  the 
United  States,  had  returned  to  normal  and  un- 
restricted business,  the  effect  on  foreign  financial 
sentiment  was  profound.  A  new  and  very  ex- 
traordinary chapter  in  our  economic  history  had 
begun. 


V  \/' 


CHAPTER  VII 
THE  SECOND  PERIOD 

WE  have  now  reached  a  point  in  our  sur- 
vey of  the  period  where  it  is  possible 
to  see  as  a  whole,  and  in  their  relation 
to  one  another,  the  makeshifts  through  which  the 
civilized  world,  eastern  and  western  hemispheres, 
belligerent  and  neutral  states,  struggled  out  of 
the  convulsion  which  shook  the  economic  firma- 
ment when  the  war  broke  out.  Expedients,  the 
suggestion  of  which  would  have  been  met  with 
scornful  incrediility  a  few  weeks  before  August, 
1 914,  and  policies  which,  even  when  formally 
proclaimed,  seemed  merely  to  be  the  snatching  at 
momentary  support  to  escape  complete  financial 
shipwreck,  had  now — such  was  the  logic  of  the 
events  which  had  crowded  on  one  another — ^taken 
their  place  as  a  consistent  chapter  in  economic 
theory  and  practice. 

This  series  of  preliminary  episodes  may  perhaps 
be  best  characterized  as  the  fight  of  the  civilized 
world  to  avert  the  greatest  panic  in  economic 
history.  The  general  insolvency  which  had  been  r 
so  widely  predicted  in  advance  was  escaped,  as 
we  have  seen,  partly  through  the  support,  on  a 

"5 


/ 


Ii6  THE  SECOND   PERIOD 

/  quite  unheard-of  scale,  of  private  by  public  credit ; 
partly  through  temporary  suspension  of  payments, 
not  on  the  part  of  individual  banks  or  markets 
but  of  communities,  nations,  and,  for  a  moment, 
of  the  entire  financial  world.  Recourse  to  these 
expedients  had  also  helped  to  avert  that  complete 
collapse  of  international  trade  which  the  British 
foreign  office  had  foretold  on  the  eve  of  war.  But 
the  time  had  now  arrived  at  the  end  of  1 914,  as  it 
arrives  in  all  great  financial  panics,  when  the  sense 
of  relief  at  escaping  the  seemingly  unescapable 
catastrophe  was  superseded  by  a  sense  of  the 
great  and  possibly  lasting  change  in  the  world's 
economic  relations.  The  ' '  emergency  expedients ' ' 
had  broken  the  force  of  panic,  but  they  could  not 
restore  pre-existing  conditions.  When  they  had 
accomplished  their  specific  task,  the  real  economic 
influences  called  into  being  by  the  war  began  to 
exert  their  imhindered  power. 

It  had,  in  fact,  required  nearly  all  of  this  five 
months*  lapse  of  time  for  bewildered  Europe  to 
realize  what  this  war  was  to  be,  even  in  its  polit- 
ical and  military  aspects.  Expectation  that  it 
would  end  with  a  short  and  triumphant  German 
march  on  Paris,  or  with  a  crushing  counterblow 
by  the  Allies,  was  no  longer  tenable,  in  or  out  of 
the  financial  markets.  During  this  period  the 
Belgian  resistance  had  broken  down.  Liege  and 
Brussels   had  fallen.     The   German   army  had 


EVENTS  OF  THE  WAR  117 

swept  almost  to  the  gates  of  Paris.  The  French 
Government  had  removed  to  Bordeaux.  The  Ger- 
mans had  been  defeated  at  the  Mame;  Paris  had 
again  become  the  seat  of  government.  Retreating 
far  to  the  northward,  Germany's  soldiers  had  be- 
gun the  trench  fighting  on  the  western  front,  which 
was  destined  to  create  a  military  deadlock  of 
nearly  two  years*  duration. 

Russia  had  invaded  Germany  and  been  driven 
back.  England  had  swept  the  seas  of  German 
shipping  and  blockaded  the  Teutonic  ports. 
Tin-key  had  joined  the  war  and  closed  the  Dar- 
danelles. German  cruisers  and  Zeppelins  had 
bombarded  improtected  English  coast  towns,  and 
the  shameful  story  of  German  brutality  and 
plimder  in  unhappy  Belgium  had  become  known 
to  the  civilized  world.  That  this  would  be  a  long 
war,  a  destructive  war,  a  war  costly  beyond  the 
furthest  previous  flight  of  imagination,  and  a 
war  in  which  international  bitterness  and  hatred 
would  reach  unparalleled  intensity,  was  now  plain 
to  the  least  experienced  observer.  The  second 
economic  chapter  of  the  war  was  about  to  begin. 
It  was  marked  by  a  distinct  and  rapid  change  in 
the  actual  position  of  both  belligerent  and  neu- 
tral markets,  but  it  was  notable  beyond  all  else 
in  the  completely  altered  relations  which  it  in- 
troduced between  Eiu*ope  and  the  United  States. 
This  chapter  of  events  began  with  191 5. 


Ii8  THE  SECOND  PERIOD 

The  European  moratoriums  had  by  the  end  of 
1 9 14  been  in  large  measure  abandoned;  the  ma- 
chinery of  the  credit  system  was  at  work  again. 
Except  for  Germany  and  Austria,  whose  coasts 
were  blockaded  by  the  British  fleet,  and  Russia, 
whose  ports  were  closed  on  the  Baltic  by  Germany 
and  on  the  Black  Sea  by  Turkey,  the  larger  bel- 
ligerent states  had  resumed  activities  in  foreign 
trade,  though  on  a  greatly  restricted  scale;  ex- 
port of  English  products  during  the  whole  of 
191 5,  for  instance,  being  cut  down  more  than  one- 
fourth  from  the  last  full  year  of  peace.  From  the 
financial  point  of  view,  the  alignment  of  the  vari- 
ous fighting  Powers  was  now  highly  interesting. 

The  results  of  the  crucial  economic  test  through 
which  each  had  passed  were  in  many  respects 
startling,  and  in  some  quite  unexpected.  England, 
although  she  had  successfully  averted  a  collapse 
of  credit,  had  been  shaken  in  prestige  by  the 
moratoritmi,  and  was  about  to  relinquish  volun- 
tarily, for  the  period  of  war,  her  position  as  the 
central  market  of  the  world.  France,  which  a 
few  years  before  had  been  lending  money  to  Ger- 
many, to  the  United  States,  and  even  to  England, 
foimd  herself  in  a  seriously  crippled  financial 
position,  in  which  (partly  because  the  enemy  was 
still  on  French  soil)  her  government  was  tmable 
to  place  long-term  loans  either  abroad  or  at  home. 
Germany's    success    in    raising    enormous    sums 


NEW  DEVELOPMENTS  119 

through  domestic  loans,  in  the  face  of  the  em- 
bargo of  her  international  commerce  and  finance, 
had  amazed  the  world.  But  her  currency  was 
depreciating;  a  premium  was  bid  on  gold  imtil 
the  Bimdesrath  imposed  prison  sentences  on  all 
who  repeated  the  exploit;  the  foreign  exchanges 
were  moving  rapidly  against  her,  and  she  had  to 
contend,  in  her  economic  as  well  as  her  political 
relations,  first  with  the  gradually  tightening  grip 
of  the  blockade  on  her  food  and  supplies,  and  next 
with  the  overwhelming  condemnation  visited  on 
her  conduct  by  the  neutral  world,  and  the  firm  be- 
lief of  that  outside  world  in  her  eventual  defeat. 

These  new  aspects  of  belligerent  Europe's  eco- 
nomic position  had  much  to  do,  as  we  shall  pres- 
ently see,  with  the  altered  course  of  events  finan- 
cial in  the  United  States.  Two  new  and  very 
striking  incidents  of  the  period  had  immediate 
bearing  on  the  situation  in  both  Continents. 
One  was  the  action  of  the  European  Powers  in 
regard  to  their  gold  supply,  in  which  some  en- 
tirely new  economic  precedent  of  war  time  was 
established;  the  other  was  the  discovery  of  what 
they  would  have  to  buy  from  producers  in  neu- 
tral states.  Experience  in  former  wars  had  taught 
the  financial  world  that,  in  a  conflict  of  larger 
magnitude,  a  belligerent  coimtry  would  rapidly 
lose  its  gold  through  export.  Such  a  movement 
always  indicated  either  transfer  of  capital  from 


I20  THE  SECOND  PERIOD 

the  uncertainties  of  a  fighting  state  to  the  refuge 
of  a  neutral  market,  or  inflation  of  paper  currency, 
which,  in  the  familiar  machinery  of  finance, 
would  drive  out  gold,  or  both  influences  com- 
bined. Both  were  reasonably  siure  to  operate  in 
the  existing  case  of  Europe. 

In  former  wars  they  had  operated  notwith- 
standing suspension  of  gold  payments  at  the 
banks  and  public  treasuries,  such  as  was  publicly 
announced  in  Germany  during  August,  19 14,  and 
tacitly  put  into  effect  by  France.  Yet  the  gov- 
ernment, first  of  Germany  and  then  of  France, 
took  this  time  the  quite  unprecedented  step  of 
calling  on  its  citizens  to  surrender  voluntarily,  in 
exchange  for  paper  money,  the  gold  in  their  pos- 
session. It  must  be  remembered  that  in  previous 
great  wars,  payment  of  gold  by  citizens  to  the 
government  had  always  ceased.  It  became, 
actually  or  prospectively,  worth  more  than  other 
forms  of  currency.  Merchants  who  had  to  use  it 
in  their  foreign  payments  paid  a  premium  to  get 
it.  Even  the  public  treasury,  when  it  needed  gold 
for  remittances  to  foreign  coimtries  or  for  interest 
on  its  debt,  had  to  bid  a  premiimi,  paid  in  its 
own  depreciated  paper.  The  exodus  of  gold  from 
the  United  States  in  our  Civil  War  was  so  well- 
known  a  phenomenon  that  politicians  who  de- 
sired to  perpetuate  the  depreciated  paper  currency, 
and  who  opposed  return  to  specie  redemption  of 


EUROPE  AND  ITS  GOLD  121 

it  after  the  war  was  over,  were  accustomed  to 
refer  in  their  campaign  speeches  to  the  ''blood- 
stained greenbacks"  which  had  stayed  with  the 
armies  and  the  people  while  the  gold  was  making 
its  cowardly  flight  to  Europe. 

The  natural  order  of  events  in  continental  Eu- 
rope of  1 9 14  would  have  been  the  same.  But  the 
German  Government,  having  by  law  forbidden 
export  of  gold  or  the  bidding  of  a  premiimi  for  it, 
issued  a  proclamation  urgently  insisting  on  the 
exchange  for  imperial  bank-notes,  at  face  value,  of 
all  the  gold  held  by  its  citizens.  This  proclama- 
tion rested  its  demand  partly  on  groimds  of  pa- 
triotism, but  partly  also  on  the  argimient  that 
gold  was  of  no  use  to  a  private  citizen  and  that 
paper  currency  was  all  that  he  had  a  right  to  ask 
for.  It  ended  with  the  curious  assurance  that  the 
imperial  post-offices,  at  which  gold  would  be  re- 
ceived in  exchange  for  bank-notes,  would  make  no 
charge  for  the  conversion.  I  have  already  re- 
ferred to  the  hoarding  of  gold  in  enormous  sums 
which  had  occurred  in  continental  Europe  during 
the  *'war  scare"  after  191 1.  Responding  to  this 
appeal,  the  gold  emerged  from  its  hiding-places. 
In  the  autumn  months  of  19 14  nearly  $20,000,000 
a  week  was  thus  turned  over  to  the  German 
Government.  During  the  first  seven  months  of 
war,  no  less  than  $250,000,000  gold  was  added  to 
the  imperial  bank's  reserve,  and  of  this  only  $50,- 


122  THE  SECOND  PERIOD 

000,000  came  from  the  government's  own  "war 
chest,"  maintained  since  1871  at  Spandau  Castle. 

In  the  middle  of  191 5  the  French  Government 
made  a  similar  appeal  to  its  citizens,  basing  its 
request  for  exchange  of  gold  on  the  plea  of  pa- 
triotism, and,  after  a  fashion  characteristically 
French,  bestowing  on  every  citizen  who  brought 
in  his  gold  an  official  certificate  of  service  to  his 
country.  Within  seven  weeks,  $100,000,000  gold 
had  been  received  by  the  Bank  of  France.  It 
could  have  come  from  nowhere  but  the  hoards  of 
private  citizens,  and  upward  of  $150,000,000  more 
came  in  before  the  end  of  191 5.  Since  neither  the 
French  nor  the  German  Government  was  paying 
out  gold,  the  upshot  of  these  remarkable  opera- 
tions was  that  the  gold  was  still  being  hoarded, 
but  by  the  public  treasury,  not  by  individuals. 
What  will  eventually  be  done  with  these  immense 
accumulations — ^by  far  the  largest  ever  held  by 
the  two  state  banks — remains  to  be  determined 
later.  The  gold  might  conceivably  be  used,  at 
the  end  of  war,  to  pay  indemnities.  It  might 
serve  to  facilitate  return  to  gold  redemption  of 
the  paper  currency.  It  might  be  used  exclusively 
for  payment  of  interest  and  principal  on  foreign 
indebtedness  incurred  during  the  war.  The  sali- 
ent fact  is,  that  the  world  had  witnessed  an  abso- 
lutely new  achievement  in  economic  history. 

The  course  of  the  British  Government  was  dif- 


TURN  IN  THE  SITUATION        123 

ferent.  Gold  payments  had  not  been  suspended 
at  the  Bank  of  England;  the  government's  early- 
proffer  of  authority  for  that  step  had  been  re- 
jected. As  we  have  seen,  the  early  months  of 
war  were  marked  by  large  gold  exports  from  New 
York  for  account  of  London.  Shipment  of  this 
American  gold  to  the  Bank  of  England's  newly 
established  branch  in  Canada,  and  the  deposit 
with  its  South  African  branch  of  the  $14,000,000 
gold  produced  on  the  average  each  month  from 
the  Transvaal  mines,  increased  the  total  gold 
holdings  of  the  bank  from  the  $138,000,000  of 
August  7,  1 9 14,  to  $362,500,000  in  the  middle  of 
November;  this,  like  the  holdings  of  the  French 
and  German  banks,  being  much  the  largest  gold 
reserve  in  the  institution's  history.  But  we  have  I 
also  seen  that  November,  19 14,  marked  the  turn  « 
in  America's  economic  fortunes.  The  New  York 
market  had  paid  its  maturing  liabilities  to  Eu- 
rope, had  protected  its  own  credit,  had  given 
plain  evidence  to  the  outside  world  of  its  confi- 
dence in  its  own  position.  At  the  very  moment 
when  an  English  commission  had  arrived  at  Wash- 
ington, with  the  belated  purpose  of  helping  to 
remove  our  difficulties  on  the  international  mar- 
ket, the  whole  situation  altered. 

Exchange  on  London  had  fallen  to  the  normal 
parity,  and  our  gold  exports  to  England  or  Can- 
ada had  ceased.     In  another  month  or  two,  ex- 


124  THE  SECOND  PERIOD 

change  was  moving  so  rapidly  in  this  country's 
favor  that  the  gold  previously  sent  from  New 
York  to  Canada  was  coming  back  again,  and  be- 
fore the  middle  of  191 5,  all  of  it  had  returned. 
During  the  whole  of  191 5  the  United  States  im- 
ported no  less  than  $451,900,000  gold,  or  nearly 
$300,000,000  more  than  in  any  previous  year. 
Of  this  huge  sum,  two-thirds  came  from  England 
and  Canada,  the  Bank  of  England's  Ottawa  re- 
serve giving  up  $218,000,000.  Despite  the  new 
supplies  received  by  it  from  the  Transvaal  mines, 
the  bank's  gold  holdings  fell  from  the  $362,500,- 
000  of  November,  19 14,  to  $251,000,000  at  the 
end  of  the  next  year.  We  have  next  to  ask  what 
were  the  causes  of  this  extraordinary  reversal  of 
conditions. 

Our  enormous  export  of  wheat  was  the  first. 
That  influence  had  not  been  overlooked  before- 
hand; for  war,  which  often  means  the  blockade 
of  belligerent  producers,  affects  the  wheat  trade 
first  among  all  industries.  Food  must  be  had  at 
any  cost,  and  the  uncertainties  of  war  therefore 
created  abnormal  demand,  even  in  such  minor 
conflicts  as  the  Franco- Prussian  War  and  our 
Spanish  War  of  1898.  The  Napoleonic  period 
was  marked  by  two  memorable  famines,  in  one  of 
which,  wheat  at  Liverpool  reached  the  highest 
price  ever  known.  Circumstances  in  the  world's 
grain  trade,  when  this  war  broke  out  in  1914,  were 


THE  AMERICAN  HARVEST        125 

somewhat  unusual.  The  United  States  was  about 
to  harvest  the  greatest  wheat  crop  of  its  history. 
The  891,000,000-bushel  yield  of  the  season  ex- 
ceeded by  127,000,000  bushels,  or  nearly  17  per 
cent  the  country's  previous  maximum.  Before 
war  began,  the  price  of  wheat  was  falling;  the 
grain  trade  doubted  its  ability  to  sell,  except  at 
greatly  reduced  prices,  the  surplus  which  would  be 
left  after  meeting  the  needs  of  home  consxmiers. 

But  this  aspect  of  the  situation  soon  changed  in 
a  very  dramatic  way.  In  face  of  the  imprece- 
dented  American  harvest,  the  crop  of  19 14  in  the 
whole  wheat-producing  world,  outside  the  United 
States,  turned  out  to  have  decreased  367,000,000 
bushels,  or  1 1  per  cent,  from  the  preceding  year. 
This  was  only  one  of  the  offsetting  considerations. 
Not  only  was  the  wheat  crop  of  Europe,  Canada, 
and  Australia  so  much  below  the  normal  average 
as  to  have  caused  a  troublesome  shortage  in  grain- 
importing  states,  even  without  the  war,  but  the 
area  of  battle  at  once  extended  over  some  of  the 
most  fertile  granaries  of  Europe,  and  meantime 
Russia,  one  of  the  two  largest  wheat-producing 
countries  of  the  world,  was  instantly  cut  off  from 
the  export  market.  In  the  twelve  months  end- 
ing with  June,  191 5,  as  a  result  of  these  remark- 
able coincidences,  the  United  States  exported  180 
per  cent  more  wheat  than  in  the  year  before,  the 
value  of  the  export  increasing  $245,000,000.    The 


126  THE  SECOND  PERIOD 

American  harvest  of  191 5  reached  1,000,000,000 
bushels. , 

It  was  in  December,  19 14,  that  our  huge  grain 
export  so  far  counterbalanced  the  decreased  ship- 
ments of  other  commodities  that  our  total  out- 
ward trade,  for  the  first  time  in  the  war,  ran  be- 
yond that  of  the  same  month  a  year  before. 
Early  in  1915,  another  and  a  yet  more  powerful 
influence  was  thrown  into  the  scales.  The  dead- 
lock of  the  military  campaign  in  western  Europe 
had  convinced  the  Allies  that  only  through  over- 
powering superiority  in  artillery  could  they  beat 
back  the  German  army.  England  and  France 
set  to  work  at  once  *' mobilizing"  their  own  in- 
dustrial plants  for  manufacture  of  ammunition; 
but  this  was  not  enough.  Orders  in  prodigious 
quantity  were  placed  with  American  contractors, 
by  whom  the  machinery  in  manufacturing  plants 
of  every  sort  was  adjusted  to  making  shells, 
rifles,  powder,  and  bullets.  As  yet  it  is  merely  a 
matter  of  estimate  what  the  total  of  such  orders 
was.  Wall  Street  at  one  time  figured  it  at  $1,000,- 
000,000.  On  the  basis  of  official  reports,  it  has 
been  shown  that,  in  the  twelve  months  after  the 
shipments  began,  $500,000,000  of  such  material 
was  exported  from  the  United  States,  and  a  very 
great  part  of  the  purchase  price  was  paid  by  Eu- 
rope in  advance. 

Under  such  varying  influences,  the  coimtry's 


OUR  WAR-TIME  EXPORTS        127 

total  exports  rose  to  stupendous  magnitude.  This 
result  was  one  of  the  unexpected  economic  phe- 
nomena of  the  war;  history  gave  no  precedent  for 
it.  It  is  true  that  the  United  States,  dtuing  the 
early  years  of  the  Napoleonic  conflict,  enlarged 
its  foreign  trade  in  a  spectacular  way.  In  1801 
we  exported  $94,000,000  worth  of  goods — a  very 
substantial  increase  from  the  previous  decade;  in 
1807  they  had  reached  $108,000,000.  But  this 
older  war-time  increase  was  not  at  all  made  up 
from  larger  shipments  of  our  home  products  to 
belligerent  Europe.  It  arose  almost  exclusively 
from  the  fact  that  the  activities  of  European 
war-ships,  in  captiuing  enemy  cargoes  on  the 
ocean,  threw  over  to  the  neutral  American  ship- 
masters the  immensely  lucrative  trade  of  the  West 
Indies. 

Eventually,  the  bulk  of  such  shipments  were 
consigned  to  American  ports,  whence  they  were 
promptly  reshipped  to  Etirope.  Whereas,  in  1792, 
this  total  of  "foreign  merchandise  re-exported'* 
from  the  United  States  was  reported  by  our  gov- 
ernment as  only  $2,109,000,  in  1799  it  had  risen 
to  $45,523,000,  and  in  1806  to  $60,283,000.  How 
extraordinary  that  achievement  was,  judged  by 
the  period  itself,  may  best  be  judged  by  the  fact 
that  the  total  of  such  re-exports  in  1806  was  not 
duplicated  imtil  191 5.  But  the  main  influence  on 
our  trade  of  191 5  was  altogether  different.     Our 


128  THE  SECOND  PERIOD 

merchandise  shipments  of  that  year  to  such  out- 
lying continents  as  Asia,  Africa,  and  AustraHa 
did  indeed  run  $42,000,000  beyond  the  largest 
previous  yeariy  total,  while  the  exports  to  South 
America  rose  $54,000,000  above  19 14,  and  ex- 
ceeded all  other  years  but  one.  This  was  itself  a 
consequence  of  the  war  and  of  the  war's  paralysis 
of  Europe's  industrial  activities.  But  how  rela- 
tively small  a  part  this  trade  with  other  neutral 
countries  played  in  the  total  increase  of  our 
exports  on  this  occasion,  is  clearly  shown  by  the 
fact  that  our  outward  trade  in  merchandise  dur- 
ing 191 5  ran  $1,433,000,000  beyond  that  of  the 
preceding  year  and  $1,063,000,000  beyond  the 
largest  previous  yearly  total  in  our  history. 

Two-thirds  of  the  increase  over  19 14  was  ac- 
counted for  by  consignments  to  England  and 
France,  and  it  was  a  peculiarly  interesting  fact 
(not  without  diplomatic  significance)  that  whereas 
our  direct  exports  to  Germany  and  Austria  de- 
creased $158,000,000 — ^in  fact,  disappeared  almost 
entirely — ^nevertheless,  our  exports  to  Holland, 
Denmark,  Norway,  and  Sweden  increased  $154,- 
800,000  over  1914,  and  exceeded  even  the  last  full 
year  of  peace  by  $182,800,000.  Prior  to  19 15  the 
highest  figiure  ever  reached  by  our  total  surplus  of 
merchandise  exports  over  imports  was  the  $691,- 
000,000  of  1 913.  The  surplus  for  the  calendar 
year    191 5    was  $1,768,000,000.     In   the  twelve 


NEW  YORK  IN  LONDON'S  PLACE    129 

months  ending  with  June,  191 6,  it  was  $2,136,- 
000,000. 

I  have  already  quoted  the  comment,  made  at 
London  in  the  auttimn  of  1914,  that  New  York 
had  "missed  the  chance  of  a  century'*  to  take 
London's  place  as  the  financial  centre  of  the 
world.  Only  two  or  three  months  later,  Lombard 
Street  itself  was  admitting  that,  for  the  period 
of  war  at  any  rate.  New  York  had  already  gained 
that  position.  It  was  early  in  January,  19 15, 
when  the  British  Government  officially  annoimced 
that  English  capital  must  be  reserved  for  the  war 
financing  of  Great  Britain  and  her  allies,  and  that 
no  new  loans  of  outside  communities  or  govern- 
ments were  thereafter  to  be  floated  in  London 
without  the  government's  consent.  From  this 
plain  declaration  of  policy  it  was  instantly  in- 
ferred, first,  that  London  had  ceased  for  the 
period  of  war  to  be  the  active  money  centre  of 
the  world;  second,  that  no  other  market  could 
undertake  that  work  except  New  York;  and, 
third,  that  the  financial  shoulders  of  the  United 
States  were  now  broad  enough  to  bear  the  bur- 
den. 

The  task,  thus  transferred  to  the  American 
market,  of  providing  money  for  the  lu-gent  finan- 
cial necessities  of  outside  commimities,  was  per- 
formed cautiously.  It  was  a  new  experiment  for 
us,  and  began  under  unusual  conditions.    But  our 


"^  130  THE  SECOND  PERIOD 

bankers  underwrote  loans  in  the  hundreds  of 
milHons  to  the  South  American  repubHcs,  to 
Canada,  to  Switzerland,  and  the  Scandinavian 
states,  and  in  return  New  York  undoubtedly  be- 
came for  the  time  the  money  market  of  the  world. 
^  The   "central  money  market'*  must  be  that 

market  to  which  the  rest  of  the  world  applies  for 
credit.  It  must  discoimt,  for  the  merchant  con- 
ducting foreign  trade  in  one  community,  and  for 
the  period  of  the  business  season,  drafts  sent 
forward  by  merchants  in  another  community 
against  goods  sold  to  him,  and  must  therefore 
provide  the  working  capital  for  international 
commerce.  It  could  not  have  been  expected  that 
the  New  York  banks  would  be  able  on  the  spot 
to  do  this  on  the  scale  of  London's  activities  be- 
fore the  war.  But  international  trade  had  been 
greatly  reduced  in  volume  by  the  war  imsettle- 
ment.  Our  own  home  demands  on  credit  were 
relatively  light.  London,  though  it  had  ceased 
to  put  its  money  into  the  securities  of  foreign 
markets,  continued  to  do  a  discoimt  business  for 
those  markets,  and  New  York  therefore  made 
its  entry  into  the  field  without  an  imdue  strain. 
It  not  only  subscribed  in  large  amounts  for  new 
securities  of  Canada  and  the  South  American 
communities,  but  entered  directly  on  London's 
business  of  providing  the  capital  for  international 
trade.     At   the  beginning  of   1915   discount  of 


FINANCING  FOREIGN  TRADE     131 

''acceptances,"  based  on  a  foreign  merchant's 
export  of  goods,  was  practically  unknown  in  New 
York  banking;  at  the  end  of  the  year  it  was 
officially  stated  that  $100,000,000  of  such  bills  of 
exchange  were  in  the  hands  of  American  banks. 

Now,  a  market  which  performs  these  services 
for  foreign  commimities,  like  a  bank  which  per- 
forms them  for  its  own  town  or  city,  pays  out  its 
capital  in  loans;  but  in  return  it  gets  back  cap- 
ital in  deposits,  which  is  the  real  source  of  profit; 
and  this  was  necessarily  the  experience  of  the  new 
money  centre.  Merchants  in  other  neutral  mar- 
kets transferred  from  London  to  New  York  the 
balances  on  which  they  were  accustomed  to  draw 
in  connection  with  their  foreign  trade.  American 
banks  and  merchants  to  a  very  great  extent  re- 
called from  London  the  balances  previously 
carried  there  for  the  same  purpose.  This  process 
had  an  important  double  influence  on  the  eco- 
nomic phenomena  of  the  year. 

It  greatly  increased  the  aggregate  of  payments 
which  England  had  to  make  to  the  United  States. 
It  also  added  a  huge  amoimt  to  the  available 
capital  on  the  American  markets.  The  first  in- 
fluence operated  on  the  rate  of  exchange  between 
New  York  and  London,  with  results  which  we 
shall  presently  have  to  examine.  The  second  went 
far  toward  explaining  the  extraordinary  achieve- 
ment of  the  American  market  during  191 5,  in 


132  THE  SECOND  PERIOD 

which  year  the  United  States  not  only  repurchased 
from  Europe  American  securities  commonly  es- 
timated at  $1,000,000,000,  but,  in  addition,  pur- 
chased more  than  $1,000,000,000  of  new  securi- 
ties issued  by  belligerent  and  neutral  European 
coimtries,  by  Canada,  and  by  the  South  Amer- 
ican republics.  This  was  an  innovation.  Amer- 
ican investors  had  never  been  in  the  habit  of 
lending  money  largely  to  the  outside  world; 
New  York^s  investment  in  England's  war  loans 
during  1900  and  1901,  and  in  Japan's  war  loans 
during  1904  and  1905,  was  of  a  temporary  nature 
and  on  a  relatively  small  scale — only  a  little  more 
than  $300,000,000  in  all.  It  was  quite  inevitable 
that  this  tangible  display  of  economic  resources, 
in  the  face  of  the  European  War,  should  have 
encouraged  the  movement  of  capital  from  outside 
markets  to  the  United  States. 

The  financial  community  itself  was  curiously 
slow  to  recognize  what  all  this  meant  to  the  ques- 
tion of  America's  own  prosperity.  When  the 
European  War  began,  the  question  asked  with 
special  urgency  in  American  business  circles  was 
how  the  United  States  could  be  safeguarded  from 
a  period  of  financial  adversity.  Eight  or  ten 
months  later,  the  prospect  of  immediate  financial 
reaction  was  conceded  to  have  disappeared,  and 
vague  talk  began  of  the  business  revival  which 
this  powerful  neutral  country  might  expect  after 


WAR-TIME  PROSPERITY  133 

the  war.  Even  when,  in  the  autumn  of  191 5,  the 
question  was  put  to  one  of  the  most  eminent  of 
our  practical  manufacturers,  **Is  the  United 
States  headed  for  tmprecedented  prosperity  ?  *'  and 
the  reply  was,  "It  is  enjoying  that  prosperity 
now,"  the  diagnosis  was  widely  disputed,  in  Wall 
Street  itself.  Prosperity,  however,  is  sometimes  a 
matter  of  definition.  What  one  merchant,  banker, 
or  speculator  would  describe  by  that  title,  another 
would  dismiss  as  not  measuring  up  to  it  at  all. 
If  by  prosperity  we  mean  such  a  period  as  1901 
or  1906,  when  every  one  seemed  to  be  making 
and  spending  money  lavishly,  when  the  word 
passed  current  that  "nothing  can  stop  the  good 
times,"  and  when  the  spirit  of  hopefulness  over 
any  and  every  kind  of  business  imdertaking  was 
apparently  under  no  restraint — ^then  the  con- 
ditions existing  in  191 5  wotdd  certainly  not  meet 
the  test.  But  there  is  prosperity  and  prosperity; 
and  it  soon  became  possible  to  appeal  to  well- 
known  criteria  which  had  long  been  accepted, 
in  financial  and  industrial  circles,  as  indicating 
whether  real  prosperity  does  or  does  not  exist. 

The  London  market,  as  even  the  English  his- 
tories show,  has  traditionally  made  great  account 
of  the  movement  of  the  foreign  exchanges,  for  or 
against  the  coimtry  whose  prosperity  is  in  ques- 
tion. If  this  were  to  be  the  test,  the  prosperity 
of  the  United  States  in  191 5  would  have  stood 


134  THE  SECOND  PERIOD 

unchallenged;  it  is  doubtful  if  ever  before  in  eco- 
nomic history  had  the  rates  of  exchange  on  all 
the  rest  of  the  world  moved  so  powerfully  in  one 
market's  favor  as  they  moved  in  that  year  in 
favor  of  New  York.  The  economic  derangement 
of  Europe  by  the  war,  however,  made  this  rather 
more  a  test  of  relative  than  of  actual  conditions. 
The  stock  market,  if  its  action  is  sufficiently 
continuous  and  emphatic,  is  another  quarter 
where  at  least  the  premonition  of  prosperity  is 
expected.  It  is  "the  ptdse,"  Macaulay  said, 
**  which  during  four  generations  has  continued  to 
indicate  the  variations  of  the  body  politic.'*  It 
performs  this  office,  chiefly  because  a  prolonged 
and  general  rise  in  prices  should  reflect  expecta- 
tion, by  the  best-informed  people  in  the  country, 
of  increasing  business  profits  for  the  transportation 
and  manufacturing  properties  whose  shares  are 
sold  on  the  stock  exchange.  For  obvious  reasons, 
this  is  a  test  which  must  be  cautiously  applied. 
Currency  inflation  will  stimulate  advancing  prices, 
measured  in  paper  money,  when  gold  values  may 
even  be  declining.  This  made  the  stock  exchange 
almost  a  useless  criterion  in  our  Civil  War.  Ex- 
perienced people  would  not  take  one  of  those 
outbursts  of  wild  speculative  mania,  which  at  in- 
tervals derange  the  whole  financial  organism,  as 
prophetic  of  sound  prosperity.  On  the  stock  mar- 
kets of  191 5,  something  like  that  was  witnessed 


TEST  OF  THE  MARKETS  135 

in  the  extravagant  rise  of  shares  of  companies 
manufacturing  war  suppUes.  But  that  movement 
reached  and  passed  its  climax;  prices  of  such 
stocks,  after  rising  25  to  100  points,  lost  half  of 
the  preceding  rise,  or  more,  in  a  violent  collapse. 
Yet  at  the  same  time  a  long  series  of  railway- 
stocks,  in  which  prices  had  risen  fully  20  per  cent 
since  the  early  months  of  1915,  held  stubbornly 
to  their  higher  values. 

Among  these  were  shares  of  the  most  conserva- 
tive American  railway  companies,  whose  fluctua- 
tion on  the  market  measures  the  attitude  of  serious 
investors.  What  was  not  least  remarkable,  the 
home  demand  which  served  to  bid  up  prices  for 
these  stocks  was  so  obstinate  as  almost  wholly  to 
offset  the  influence  of  Europe's  sales  to  us  of  its 
own  holdings  of  these  shares.  Europe  had  been 
selling  back  our  best  railway  and  industrial  bonds 
also,  and  it  had  become  a  matter  of  common  pre- 
diction that  a  violent  fall  of  prices  for  American 
bonds  must  be  inevitable  as  a  result  of  the  high 
European  bid  for  capital.  Yet  what  happened  in 
November  was  the  largest  dealing  in  bonds  that 
the  stock  exchange  had  witnessed  in  half  a  dozen 
years,  and  an  advance  in  prices  so  rapid  as  to 
bring  them  nearly  or  quite  up  to  the  earlier  high 
level  of  1 9 14. 

These  indications  showed  chiefly  what  was 
expected.    There  were  other  indications  of  what 


I 


/ 


136  THE  SECOND  PERIOD 

must  actually  have  occurred.  One  very  familiar 
test  of  active  and  prosperous  trade,  financial 
observers  find  in  what  are  known  as  the  country's 
clearing-house  exchanges.  Every  bank,  receiving 
as  deposit  from  a  client  the  checks  drawn  in  his 
favor  on  other  institutions,  sends  those  checks  to 
its  district  clearing-house,  whence  they  are  for- 
warded for  collection  to  the  banks  on  which  their 
maker  drew  them.  From  this  process  it  results 
that  the  total  money  value  of  the  checks  thus 
exchanged,  in  a  given  period  at  all  American 
clearing-houses,  indicates  accurately  the  total 
payments  made  in  connection  with  the  business 
activities  of  the  period.  The  actual  figures  are 
carefully  tabulated.  Until  the  autumn  of  191 5, 
the  largest  weekly  total  of  such  bank  exchanges 
in  this  country  was  the  huge  sum  of  $4,868,000,- 
000  in  the  first  week  of  19 10.  But  in  the  third 
week  of  November  no  less  than  $4,903,000,000 
checks  changed  hands — an  increase  of  74  per  cent 
over  the  same  week  in  1914,  of  42  per  cent  over 
1 9 13,  and  of  37  per  cent  over  even  the  very  active 
business  season  of  191 2.  No  month  in  the  coun- 
try's history  had  ever  approached,  in  the  total 
magnitude  of  checks  drawn  for  business  purposes, 
the  closing  month  of  191 5.  During  the  first  half 
of  1 91 6,  the  total  rose  nearly  40  per  cent  above 
the  highest  record  for  any  previous  correspond- 
ing period. 


IRON  OUTPUT  IN  THE  WAR        137 

'  The  monthly  statements  of  the  country's  iron 
I  production  are  an  even  more  tangible  sign  of  in- 
dustrial activity.  When  business  in  general  is 
reviving  and  the  outlook  for  active  and  profitable 
general  trade  is  bright,  orders  at  once  increase 
with  the  iron-mills.  The  reason  is,  that  every 
other  industry  has  to  increase  its  steel  and  iron 
equipment  in  preparing  for  an  active  season.  The 
farmer  needs  new  agricultural  machinery.  Mer- 
chants and  miscellaneous  manufacturers  wish  to 
enlarge  their  working  establishments.  The  rail- 
ways must  have  more  cars  and  locomotives  and 
rails;  the  steel-mills  themselves  will  be  adding  to 
their  own  productive  facilities.  Active  demand 
for  all  these  prospective  purposes  will  be  seen  in 
the  steel  and  iron  trade's  order-books,  even  before 
the  signs  of  visible  activity  have  appeared  in  the 
industries  which  want  the  new  material.  These 
are  the  reasons  why  iron  is  known  traditionally 
as  the  "barometer  of  trade,**  and  why  a  rise  in 
steel  and  iron  prices,  and  steady  increase  in  steel 
and  iron  production,  ordinarily  mean  general 
trade  revival. 

At  the  end  of  191 2,  just  before  the  industrial 
revival  stimulated  by  what  were  then  our  record- 
breaking  crops  had  been  checked  by  the  danger- 
ous turn  taken  in  the  Balkan  War,  all  precedent 
was  surpassed  in  American  iron  production.  The 
average  daily  output  of  92,600  tons,  reached  dur- 


138  THE  SECOND  PERIOD 

ing  February,  1913,  remained  the  maximum  of 
the  country's  history  until  September  of  191 5. 
That  month  ran  sHghtly  beyond  the  1913  figure; 
the  next  month's  average  daily  output  crossed 
for  the  first  time  the  100,000-ton  mark,  and  the 
total  monthly  output  went  in  October — again  for 
the  first  time  in  the  trade's  records — ^beyond 
3,000,000  tons.  The  monthly  average  for  the 
year  of  largest  production  in  our  previous  history 
had  been  barely  2,500,000.  ** Never  before,"  the 
Iron  A  gey  a  highly  conservative  organ  of  the  in- 
dustry, remarked  of  these  October  figures,  "has 
the  steel  trade  seen  demand  so  overv:helming, 
and  at  the  same  time  its  output  expanding  on 
such  a  scale,  imder  steadily  rising  prices."  Yet 
only  six  months  later,  the  output  was  ten  per 
cent  greater. 

One  obvious  criticism  on  the  testing  of  pros- 
perity by  the  steel  and  iron  situation  alone  was 
that  orders  for  war  mimitions,  placed  in  this 
country  on  so  great  a  scale,  had  been  an  immense 
stimulus  to  that  industry,  yet  were  not  in  the 
nature  of  a  permanent  influence.  There  was 
force  in  this  objection;  it  was  largely  offset,  how- 
ever, by  the  fact  that  these  very  requisitions  for 
use  in  war  supplies  had  started  up  inquiry  for 
other  purposes  from  home  consumers.  It  was 
their  demands  which  brought  the  steel  trade,  in 
the  early  months  of  191 6,  to  the  actual  limit  of 


INCREASED  RAILWAY  EARNINGS     139 

its  producing  capacity.  There  was  still  another 
test  of  active  trade  which  always  appeals  to  the 
financial  markets.  By  the  middle  of  October  the 
railway  tracks  and  terminals,  East  and  West,  be- 
gan to  be  blocked  with  freight.  No  such  visible 
overflowing  of  transportation  facilities  by  offer- 
ings of  traffic  had  been  witnessed  in  this  country 
since  1906,  and  it  is  doubtful  if  the  strain  had  been 
equally  severe  since  the  sudden  and  rapid  trade 
revival  of  1899  caught  the  railways  utterly  im- 
prepared. 

As  early  as  September,  191 5,  the  Pennsylvania 
Railroad  reported  the  largest  total  earnings,  and 
the  largest  excess  of  earnings  over  working  ex- 
penses, of  any  month  in  its  history.  If  it  be  said 
that  this,  too,  may  have  largely  meant  the  mu- 
nitions trade  (the  Pennsylvania  runs  through 
Pittsburgh),  there  were  other  railways  to  compare 
with.  When  their  October  statements  were  given 
out  by  railways  in  the  Middle  West,  in  the  North- 
west, on  the  transcontinental  route,  all  were  sub- 
stantially up  to  the  highest  previous  record  for  the 
month,  and  a  considerable  number,  like  the  Penn- 
sylvania in  the  month  before,  surpassed  all  previ- 
ous monthly  figures.  These  at  least  were  no 
matter  of  war  materials.  The  general  manager 
of  one  of  the  largest  railways  running  between 
Chicago  and  New  York  remarked  at^the  end  of 
November:  "People  who  think  the  war  munitions 


I40  THE  SECOND  PERIOD 

are  blocking  the  movement  of  freight  should  spend 
a  few  minutes  in  our  freight-yards.  You  will  find 
them  blocked  with  cars  loaded  with  meat,  auto- 
mobiles, locomotive  and  freight-car  parts,  and  a 
thousand  commodities  not  used  in  war,  and  you 
will  find  the  freight  consigned  not  only  to  Europe, 
but  to  South  America,  India,  and  all  the  rest  of 
the  world.'* 

More  than  this:  in  the  last  week  of  October, 
deliveries  of  grain  by  Western  farmers  to  the 
railways,  at  what  the  grain  trade  calls  the  "pri- 
mary receiving  points,'*  not  only  rose,  10,000,000 
bushels  above  the  same  week  in  19 14,  but  exceeded 
by  not  quite  6,000,000  bushels  the  30,990,000 
bushels  delivered  in  the  third  week  of  September, 
191 2 — ^which,  tmtil  the  auttmm  of  191 5,  were  the 
high  mark  of  the  grain  trade.  This  itself  reflected 
yet  another  traditional  weather-sign  of  reviving 
industry:  the  fact  that,  by  the  government's 
final  autumn  estimate,  the  yield  of  the  coimtry's 
five  great  grain  crops  was  5,892,601,000  bushels, 
as  against  4,942,613,000  actually  harvested  in 
1914,  and  5,532,838,000  in  the  most  abundant 
previous  season — that  of  191 2. 

What  all  this  signified  should  have  been  plain 
enough.  The  tests  thus  applied  covered  prac- 
tically every  measure  of  business  prosperity,  and 
each  gave  emphatic  witness  to  the  existence  of 
such  prosperity.    There  still  remained,  and  will 


"WAR  BOOMS'*  141 

doubtless  continue  to  remain,  a  body  of  opinion 
which,  conceding  all  these  evidences,  held  the 
position  that  prosperity  was  ill-distributed  among 
the  different  industries  and  the  different  sections 
of  the  country;  but,  more  than  this,  that  what- 
ever prosperity  existed  was  precarious,  temporary, 
based  on  wholly  abnormal  influences.  In  other 
words,  the  conditions  thus  suddenly  created  dur- 
ing 191 5,  and  continuing  throughout  the  next  year, 
merely  represented  one  of  those  '*war  booms'* 
which  history  records  at  the  crisis  of  all  great 
conflicts,  even  in  the  belligerent  commimities — 
prosperity  of  the  kind  which  induced  the  furious 
activity  of  1809  in  England  and  1864  in  the 
United  States,  but  which  ended  in  each  case  in 
the  prolonged  reaction  of  a  few  years  later. 

Neither  of  these  contentions  can  be  lightly 
dismissed.  Yet  it  is  pertinent  to  ask  whether, 
even  so,  they  affected  the  question  whether  Amer- 
ican prosperity  was  actually  imder  way.  There 
has  never  been  an  American  trade  revival  of  the 
past  in  which  some  industries  and  some  com- 
mimities,  for  reasons  peculiar  to  themselves,  did 
not  hang  back  behind  the  others.  There  has 
never  been  a  period  of  American  prosperity — 
even  in  the  so-called  *'boom  years"  of  1872  or 
1880  or  1 90 1  or  1906 — ^which  did  not  have  some- 
thing of  the  temporary  and  the  precarious  about 
it. 


142  THE  SECOND  PERIOD 

If,  indeed,  the  American  industrial  revival  of 
1 91 5  had  as  its  sole  basis  the  "war  orders"  from 
Europe,  and  especially  if  it  was  stimulated  by  an 
inflated  paper  currency  at  home,  there  would  be 
something  more  to  say.  But  neither  of  these  con- 
ditions actually  existed.  The  fundamental  phe- 
nomena were  the  soundness  of  economic  conditions 
in  the  coimtry  on  which  these  imexpected  wind-1 
falls  descended,  and  the  rapidity  with  which  the 
movement  of  expansion  extended  to  industries 
dependent  on  domestic  orders  and  on  the  needs  of 
peaceful  trade.  It  is  even  possible  to  construct 
a  theory  of  the  existing  situation  as  a  trade  re- 
vival accidentally  and  artificially  postponed.  In 
America  the  tradition  of  the  **  cycle  of  prosper- 
ity" is  invariable,  to  the  effect  that  after  a  great 
financial  panic  five  or  six  years  (not  more)  are 
needed  for  liquidation  and  recuperation;  after 
which  the  great  forward  movement  begins  again. 
It  began  in  1879,  following  1873,  and  in  1898, 
following  1893,  and  many  signs  indicated  resump- 
tion in  19 1 2  of  such  a  movement,  when  the  re- 
action of  1907  had  spent  its  force.  In  what  way 
this  return  to  American  prosperity  was  arrested 
by  the  political  apprehensions  and  disturbances  in 
Europe,  every  one  knows. 

Sometimes  compulsory  postponement  of  so 
normal  a  movement  of  recovery  means  that  the 
forces  making  for  legitimate  expansion   at  the 


POSITION  OF  AMERICA  143 

earlier  date  will  have  grown  stronger  for  being 
held  in  check.  At  all  events,  it  is  under  precisely- 
such  circumstances  that  the  United  States  will 
confront  the  changed  world,  with  its  new  financial 
and  industrial  conditions,  which  is  to  emerge  from 
this  war  whenever  peace  actually  returns.  Noth- 
ing will  then  be  quite  as  it  has  been  in  the  past; 
all  economic  relationships  between  the  different 
nations  will  be  altered.  But  the  position  occupied 
by  the  United  States  at  the  beginning  of  the  new 
economic  era  will  be  something  very  striking,  very 
imusual,  and  economically  very  poverful. 


CHAPTER  VIII 

CURRENCY  INFLATION 

THAT  inflation  of  the  paper  currencies  of  the 
belligerent  states  would  be  an  inevitable  in- 
cident of  such  a  war  as  this,  was  the  un- 
questionable teaching  of  history.  Depreciation 
in  such  currencies  was  singularly  absent  from 
financial  calculations  at  the  outbreak  of  the  war; 
this  notwithstanding  the  very  general  prediction 
of  economists,  in  previous  discussion  of  the  prob- 
able phenomena  of  a  general  European  conflict, 
that  gold  payments  could  not  be  maintained 
under  such  conditions.  Yet  experience  had  taught 
that  every  prolonged  and  costly  war  of  the  pre- 
ceding centiuy  had  been  characterized  by  issue 
of  paper  money,  in  such  quantity  as  to  exert  far- 
reaching  economic  influence  on  the  markets.  In 
the  course  of  our  own  four-year  Civil  War  par- 
ticularly, the  United  States  Government  issued 
$450,000,000  of  paper  money;  our  actual  paper 
circulation  increasing,  between  1861  and  1865,  no 
less  than  270  per  cent.  Government  calculations 
of  the  average  prices  of  commodities  in  this  coun- 

144 


EUROPE'S  PAPER  MONEY         145 

try  showed  an  advance  of  116  per  cent  during  the 
same  period,  and  that  movement  was  accom- 
panied by  a  violent  rise  on  the  stock  exchanges, 
and  by  what  seemed  to  be  a  notable  forward 
movement  of  prosperity. 

There  were  secondary  causes  for  the  war-time 
rise  of  prices  in  the  sixties,  and  for  the  resultant 
speculative  expansion;  among  them  the  War 
Department's  ptu-chases,  the  blockade  of  the 
South,  and  the  rising  price  of  a  labor  market  de- 
pleted by  enlistments  in  the  army.  But  no  in- 
telligent reader  of  history  doubts  that  the  pri- 
mary cause  was  the  paper-money  inflation.  Since 
the  after-results  of  that  inflation  were  disastrous, 
it  is  not  unreasonable  to  ask  whether  our  financial 
and  industrial  revival  of  191 5  may  not  have  been 
based  on  similar  causes,  and  may  not  be  destined 
to  a  similar  unhappy  end. 

Taking  the  world  at  large,  there  is  no  doubt 
whatever  as  to  the  fact  of  paper-money  inflation 
during  this  present  war.  Between  July,  19 14, 
and  the  middle  of  191 6  Germany's  paper  cur- 
rency increased  from  $473,000,000  to  $1,740,000,- 
000,  or  something  like  320  per  cent.  France 
brought  its  bank-note  issues  from  $1,336,000,000 
to  $3,100,000,000,  an  expansion  of  131  per  cent. 
In  Russia,  the  Imperial  Bank's  note  issues  alone, 
which  were  $930,000,000  at  the  outbreak  of  the 
war,  reached  $2,650,000,000  at  the  end  of  191 5  and 


146  CURRENCY  INFLATION 

$3,100,000,000  three  months  later.  This  was  an 
increase  of  336  per  cent,  and  there  was  probably 
other  currency  put  out.  Austria  has  not  ventured 
to  publish  the  figures  of  her  war-time  paper- 
money  issues,  but  they  were  certainly  very  large. 
The  Bank  of  England's  note  circulation  had 
increased  by  the  middle  of  19 16,  as  compared  with 
July,  1914,  only  from  $148,500,000  to  $176,500,- 
000,  or  less  than  20  per  cent.  But  the  special 
currency  authorized  by  the  British  Government 
when  the  war  began — put  out  by  the  treasury  for 
account  of  the  English  joint-stock  banks,  and  se- 
cured by  government  bonds,  commercial  paper, 
and,  during  1915  and  1916,  by  $142,500,000  in 
gold — ^had  risen  by  the  middle  of  1916  to  no  less 
than  $586,000,000.  Including  this  amount,  the 
increase  in  England's  paper  issues,  since  the  war 
began,  was  515  per  cent.  It  is  true  that  these 
English  ** currency  notes,"  being  secured  in  part 
with  gold,  obtain  a  character  which  the  $300,- 
000,000  or  more  of  '  *  Darlehnskassenscheine "  in 
Germany  (against  which  no  gold  at  all  is  held) 
do  not  enjoy.  It  should  also  not  be  overlooked 
that  while  the  Continent's  currency  expansion  of 
war  time  came  on  top  of  bank-note  circulations 
only  partly  protected  with  gold,  the  Bank  of  Eng- 
land's own  note  issues,  now  as  heretofore,  are  se- 
cured in  gold  up  to  their  full  face  value.  Never- 
theless, we  are  primarily  investigating  inflation  of 


INFLUENCE  OF  WAR  147 

European  currencies,  and  the  fact  of  immense  ex- 
pansion appears  in  all  of  them. 

There  are  three  main  reasons  why  every  pro-  yC 
longed  war  of  modem  history  has  been  attended 
by  this  inflation  of  paper  currencies.      One  is,    V^ 
that  the  experience  of  the  race  has  taught  people 
to   hoard   gold   and   silver   when   their   country 
pltmges  suddenly  into  the  uncertainties  of  war. 
That  action  makes  it  necessary  to  provide  a  sub- 
stitute for  coin  in  hand-to-hand  payments.     An-     /^ 
other  is  that  gold,  the  international  currency,  is 
apt  to  be  sent  by  its  owners,  for  safe-keeping  or 
as  a  means  of  transferring  capital,  from  the  mar- 
kets of  a  belligerent  state  to  those  of  a  neutral 
country — which  may  similarly  create  a  void  in 
the  fighting  country's  circulating  medium.     The    yC, 
third  reason  lies  in  the  fact  to  which  I  have  re- 
ferred already;  that  paper  currency,  created  by  a 
government,  may  be  used  to  meet  at  least  a  part 
of   that   government's   immensely   increased   ex- 
penditure during  war. 

All  three  of  these  influences  had  some  hand  in 
the  war-time  inflation  of  Europe's  paper  curren- 
cies. But  almost  all  of  the  new  currency  issued 
by  the  belligerent  states  has  in  this  one  respect 
differed  radically  from  that  of  former  war-inflation 
periods — it  was  not,  like  our  greenbacks  of  the 
Civil  War  and  the  assignats  of  the  French  Rev- 
olution, government  fiat  money,  put  out  directly 


148  CURRENCY  INFLATION 

by  the  national  treasury  to  pay  the  expenses  of 
government.  Most  of  the  new  European  paper 
money  of  19 14  and  191 5  was  issued  by  the  central 
bank  of  each  respective  belligerent,  and  had  to  be 
offset,  on  the  balance-sheet  of  the  issuing  institu- 
tion, by  a  corresponding  sum  in  commercial  loans, 
or  public  and  private  securities,  or  actual  gold 
and  silver. 

But,  on  the  other  hand,  the  bank  could  issue 
its  notes  to  the  government,  taking  new  govern- 
ment bonds  as  seciuity;  and  since  single  war 
loans  of  the  belligerent  states  have  been  made  in 
simis  as  large  as  $3,000,000,000,  it  was  possible 
that  the  new  currency  should,  by  this  process, 
pass  directly  into  the  government's  hands,  and 
be  used  for  meeting  current  public  expenses — 
just  as  an  old-time  ** fiat-money  issue"  would  be 
used.  With  the  Bank  of  France,  for  instance,  the 
$1,525,000,000  increase  in  its  note  circulation,  be- 
tween July,  1 9 14,  and  the  maximum  figiire  of 
191 5,  was  offset  on  the  other  side  of  the  accoimt  by 
$1,480,000,000  imder  the  entry,  ** Advances  to 
the  State  for  the  War." 

As  to  precisely  what  has  been  the  effect  on 
Europe  itself,  of  this  enormous  currency  inflation, 
it  is  still  early  to  draw  conclusions.  On  the 
Continent,  gold  redemption  of  the  paper  cur- 
rency, which  was  in  force  in  all  the  important 
states  before  the  war,  was  formally  or  tacitly 


MEASURING  DEPRECIATION       149 

abandoned,  as  soon  as  the  war  began.  An  open 
premium  on  gold  was  not,  however,  paid  in  191 5 
or  1 91 6  on  any  European  market;  that  evidence 
of  currency  depreciation  was  averted  in  Germany 
by  penal  statute,  and  in  France,  apparently,  by 
common  consent.  But  this  still  left  the  rate 
of  exchange  on  the  markets  of  such  cotmtries, 
ctirrent  in  neutral  cities,  to  meastu*e  actual  de- 
preciation. The  rate  of  New  York  exchange  on 
Paris  or  Berlin,  for  instance,  merely  means  what 
American  bankers  will  give  in  American  money 
to  a  merchant  for  his  claim  on  a  solvent  French 
or  German  debtor,  payable  in  France  or  Germany 
in  the  currency  of  that  coimtry. 

Since  the  bankers,  under  existing  conditions,  paid 
gold  or  its  equivalent  for  the  draft,  while  know- 
ing that  it  would  not  be  redeemed  in  gold  in  the 
market  on  which  it  was  drawn,  they  could  scarcely 
be  expected  to  pay  as  much  for  it  as  they  paid 
in  days  when  it  commanded  gold.  There  have 
been  other  causes,  presently  to  be  examined,  for 
the  depreciation  of  exchange  rates  on  belligerent 
Europe  at  New  York.  But  this  cause  was  so 
entirely  obvious  that  depreciation  in  continental 
exchange  would  unquestionably  have  resulted 
from  it,  even  if  the  ** merchandise  trade  balance" 
had  remained  as  it  was  before  the  war.  The  fact, 
then,  that  whereas  a  franc  is  worth  intrinsically 
19.3  cents  in  American  money,  the  New  York 


> 


so  CURRENCY  INFLATION 


dealer  in  exchange  paid  only  15.7  for  it  early  in 
191 6,  and  that  whereas  a  German  mark,  on  the 
specie  basis,  is  valued  at  23.8  cents,  it  brought 
less  than  18  cents,  was  in  very  large  measure  the 
reflection  of  a  neutral  market's  effort  to  measure 
the  difference  between  gold  values  and  the  value 
of  a  depreciated  currency. 

But  the  inflation  process  has  not  produced  on 
Europe's  markets  the  effects  which  followed  it  in 
this  country  after  1861.  It  is  true  that  English 
prices  of  commodities  have  risen  violently — the 
London  Economist's  monthly  "index  number"  of 
average  prices  had  reached  4,319  at  the  end  of 
May,  1916,  as  against  3,250  in  the  middle  of 
19 1 5,  and  2,565  when  the  war  began.  For  this, 
however,  as  for  the  similar  rise  on  the  European 
Continent  and  the  striking  though  less  violent 
advance  in  the  United  States,  the  prodigious  de- 
mand for  all  kinds  of  war  material,  the  blockade 
of  producing  countries,  and  the  abnormally  high 
ocean  freight  rates  are  sufficient  explanation.  But 
there  was  no  excited  ''boom"  in  European  busi- 
ness, except  for  the  war  contractors  and  the  lucky 
owners  of  ocean  steamers;  no  enthusiastic  specu- 
lation for  the  rise  on  the  stock  exchanges.  That 
was,  perhaps,  because  the  artificial  stimulus  of  in- 
flation had  been  only  sufficient  to  counterbalance 
the  crushing  financial  burdens  of  the  war,  avert 
a  general  collapse  of  enterprise  and  credit,  and 


CASE  OF  THE  UNITED  STATES     151 

maintain  some  sort  of  equilibrium  on  the  mar- 
kets. 

This  very  fact,  however,  brings  up  the  question 
whether  the  markets  of  the  United  States,  where 
the  burden  of  war  did  not  exist,  might  not  have 
owed  their  condition  of  aggressive  prosperity  to 
inflation.  It  is  true  that  the  fact  of  a  premiimi, 
not  a  discoimt,  on  American  currency  in  the 
terms  of  foreign  money,  might  be  taken  as  prima- 
facie  evidence  that  our  own  currency  was  in  a 
normal  condition,  and  it  is  certain  that  the 
American  paper  currency  continued  to  be  re- 
deemed in  gold.  Nevertheless,  it  was  inevitable, 
when  all  the  original  predictions  as  to  the  effect 
of  the  European  War  on  American  finance  had 
been  upset — when  actual  results  had  turned  out 
precisely  the  contrary  of  what  the  most  sagacious 
home  and  foreign  opinion  had  foreshadowed — • 
that  some  people  should  presently  begin  to  doubt 
the  reality  of  the  achievement.  This  country 
had  habitually  looked  to  Europe  for  the  loan  of 
money  to  meet  the  expenses  of  harvesting  our 
crops  and  sending  them  to  market;  the  loans, 
very  large  in  amoimt,  being  repaid  from  the  sub- 
sequent export  of  our  produce.  The  war  and 
the  war  loans  put  an  end  to  such  assistance. 
London  no  longer  had  anything  to  spare  for  loans 
to  America.  Severe  stringency  in  New  York's 
autumn  money  market   was,   therefore,   not  il- 


152  CURRENCY  INFLATION 

logically  predicted.  Yet  the  largest  grain  har- 
vest in  our  history  was  financed  from  home  re- 
sources during  191 5,  with  the  American  money 
market  tmruffied  and  rates  almost  the  lowest  on 
record. 

European  investors  held  in  July,  19 14,  as  they 
had  held  during  many  decades,  three  to  four 
thousand  million  dollars  of  American  securities. 
In  the  half-dozen  preceding  years  we  had  man- 
aged to  provide  for  our  own  industrial  necessities 
only  by  selling  several  hundred  millions  per  an- 
num of  newly  issued  stocks  and  bonds  to  Europe. 
Europe,  however,  was  now  not  only  unable  to 
continue  such  purchases,  but  her  investors  were 
certain  to  sell  back  to  us  in  enormous  quantity 
what  they  had  already,  in  order  to  raise  money 
for  the  $10,000,000,000  or  more  of  war  loans  is- 
sued annually  by  the  belligerent  governments. 

It  has  been  calculated  by  the  most  careful 
statisticians  that  at  least  $1,000,000,000  of  Amer- 
ican seciuities  were  resold  by  Europe  to  New 
York  between  the  reopening  of  our  stock  exchange 
in  December,  19 14,  and  the  end  of  191 5.  Yet 
not  only  did  the  American  market  take  them,  but 
it  loaned,  on  its  own  account,  a  sum  only  slightly 
less  to  foreign  coimtries  which  had  always  here- 
tofore sold  their  new  securities  in  France  and 
England;  and,  in  the  face  of  this  double  burden, 
prices  on  our  stock  and  bond  markets  actually 


/ 

AMERICAN  OPINION  153 

rose  beyond  the  level  which  prevailed  before  the 
war. 

It  was  undoubtedly  our  enormous  export  trade,  y 
first  in  grain  and  then  in  war  munitions,  the  re- 
sultant increased  command  over  European  cap- 
ital, and  the  great  amoimts  of  capital  which  other 
neutral  markets  transferred  from  London  to  New 
York,  which  primarily  explained  the  ability  of 
the  United  States  to  perform  this  bewildering 
achievement.  The  unprecedentedly  large  import 
of  gold  from  Etirope  to  the  United  States  had  a 
hand  in  the  result;  it  provided  a  basis  for  legiti- 
mate expansion  of  bank  loans,  whereby  these  large 
home  operations  could  be  easily  financed.  But 
the  transactions  themselves  so  completely  over- 
topped anything  in  our  previous  financial  history, 
and  were  conducted  in  such  sudden  sequence  to 
a  period  of  seeming  weakness  and  reaction,  that 
these  explanations  did  not  appear  sufficient. 

It  is  not  therefore  to  be  wondered  at  that 
cautious  people  should  have  begun  to  ask  if  there 
was  not  something  imreal,  something  fictitious, 
and  therefore  something  precarious  and  tempo- 
rary, in  this  display  of  imheard-of  prosperity.  A 
well-known  financier,  one  of  the  members  of  our 
national  banking  commission,  in  191 5  described 
the  attitude  of  American  financiers  as  embodied 
in  **two  schools  of  thought,  one  looking  into  the 
future  with  unbounded  confidence,  and  the  other 


1 54  CURRENCY  INFLATION 

anticipating  drastic  reaction  and  collapse."  More 
specifically,  the  question  began  to  be  put,  whether 
the  United  States,  along  with  the  rest  of  the 
world,  might  not  have  entered  an  era  of  currency 
inflation.  Experience  had  taught  that  inflated 
paper  money  is  the  best-known  necromancy  for 
creating  illogical  and  impossible  conditions  in  the 
way  of  national  prosperity — though  with  after- 
results  which  justify  all  the  warnings  of  the  scep- 
tics. 

One  admitted  fact  might  have  been  deemed  to 
indicate  the  existence  of  that  influence;  the  issue 
by  our  banks  under  government  supervision,  in  the 
first  three  months  after  July,  19 14,  of  $380,000,- 
000  in  ** emergency  currency."  There  was  yet 
another  possible  influence  toward  such  artificial 
stimulus.  Under  our  new  banking  system,  put 
into  operation  four  months  after  the  war  broke 
out,  the  Federal  Reserve  Banks  of  the  twelve 
designated  districts  were  empowered  to  issue  cir- 
culating notes  on  certain  prescribed  collateral, 
provided  they  kept  on  hand  a  40  per  cent  reserve 
in  gold.  The  gold  in  the  vaults  of  these  institu- 
tions at  the  end  of  19 14  bore  that  percentage  to 
$625,000,000;  at  the  end  of  191 5  they  held  in  gold 
40  per  cent  of  $896,000,000.  In  theory  at  any 
rate,  issue  of  that  much  in  new  paper  currency  was 
possible.  Here  was  apparently  the  machinery  for 
such  expansion  of  the  American  paper  currency  as 


OUR  OWN  PAPER  MONEY        155 

wotild  cut  a  respectable  figure,  even  as  compared 
with  Europe.    Was  the  Federal  Reserve  cturency,  \ 
then,  a  governing   influence   in   the   unexpected 
chapter  of  prosperity  which  began  in  the  middle 
of  1915,  or  was  it  not  ? 

The  answer  is  not  difficult,  and  it  is  quite  the 
reverse  of  what  a  good  many  people,  even  those 
of  practical  experience,  seem  to  think.  That  the  y 
successftd  establishment  of  the  new  banking  sys- 
tem was  an  important  factor  in  promoting  finan- 
cial confidence,  and  thus  in  clearing  the  ground 
for  last  year's  American  revival,  there  can  be 
little  doubt.  Knowledge  that  its  facilities  were 
such  as  to  meet,  effectively  and  instantly,  the 
necessities  either  of  a  "financial  boom"  or  a 
*' financial  panic,"  removed  much  of  the  pre-exist- 
ing apprehension.  But,  contrary  to  very  general 
supposition,  those  facilities  remained  to  all  in- 
tents unused  diuing  the  great  revival  of  American 
prosperity  in  191 5.  Therefore  they  cannot  have 
been  a  factor  of  ''inflation."  The  $380,000,000 
emergency  cturency,  issued  at  the  beginning  of 
the  war,  had  all  been  retired  and  cancelled  before 
the  end  of  Jtme,  191 5.  During  that  cancellation 
process,  the  Federal  Reserve  Banks  were  begin- 
ning to  issue  notes,  and  a  substantial  amoimt  of 
them  is  now  outstanding.  Yet  our  total  bank 
currency,  old  and  new,  which  aggregated  $1,121,- 
000,000  on  November  i,   1914 — just  before  the 


IS6  CURRENCY  INFLATION 

new  banking  system  was  introduced — stood  only 
at  $985,400,000  on  January  i  of  1916.  It  had 
been  reduced  to  $929,300,000  by  the  middle  of 
1916. 

In  other  words,  the  country's  paper  currency 
decreased,  not  increased,  during  the  war-time  re- 
vival in  American  finance.  The  point  is  occasion- 
ally made  that,  whatever  may  have  happened 
since  November,  1914,  the  stun  total  of  bank-note 
ciurency  outstanding  in  the  middle  of  191 6  was, 
nevertheless,  $186,000,000  greater  than  at  the 
outbreak  of  the  war  in  August,  19 14.  This  is 
quite  true,  and  $176,000,000  of  that  increase  con- 
sisted of  the  new  Federal  Reserve  notes.  But  in 
that  direction  also,  some  very  significant  facts  are 
commonly  overlooked. 

Under  the  law,  a  reserve  bank  is  allowed  to 
issue  notes,  either  secured  with  commercial  paper 
pledged  by  individual  banks  in  the  district,  or 
seciu*ed,  dollar  for  dollar,  with  gold  coin.  In 
the  first  case,  the  notes  become  the  elastic  credit 
ciurency  contemplated  by  the  Federal  Reserve 
Act.  In  the  second  case,  they  are,  to  all  intents 
and  purposes,  on  the  footing  of  the  familiar  gold 
certificates,  issued  by  the  treasury  against  an 
equivalent  deposit  of  gold  in  the  government 
vaults  at  Washington.  Now,  when  the  $176,000,- 
000  Federal  Reserve  notes,  as  of  July  i,  19 16, 
are  analyzed,  the  remarkable  fact  appears  that 


THE  FEDERAL  RESERVE  NOTES  157 

only  $10,200,000  of  them  were  the  elastic  currency 
secured  by  commercial  paper,  whereas  $165,800,- 
000  were  the  circulating  equivalent  of  actual  gold. 
Six  months  later,  the  amoimt  of  such  notes  out- 
standing, based  on  merchants*  credits,  was  even 
less. 

As  to  why  the  banks  should  have  preferred  to 
issue  notes  through  pledging  gold  against  them, 
dollar  for  dollar,  instead  of  securing  them  with 
40  per  cent  gold  and  the  balance  in  commercial 
paper,  the  answer  is  simple.  Because  of  its 
enormous  exports  to  belligerent  Europe,  and  of 
its  position  as  a  sectu-e  neutral  custodian  of  trea- 
sure, the  United  States  imported  during  191 5  no 
less  than  $451,900,000  of  foreign  gold,  or  nearly 
$300,000,000  beyond  any  previous  year;  and,  in 
addition,  it  produced  from  its  own  gold-mines 
nearly  $100,000,000  more.  The  banks  had  actu- 
ally more  gold  in  their  vaults  at  the  end  of  191 5 
than  they  had  need  to  use  as  a  basis  for  their 
loans  to  American  finance  and  industry.  There- 
fore they  chose,  for  the  convenience  of  their  cus- 
tomers, to  put  a  considerable  part  of  it  into  general 
hand-to-hand  circulation  in  the  form  of  notes. 

The  total  stock  of  money  in  the  United  States 
increased  $429,000,000  during  191 5.  But  the  in- 
crease in  gold  alone,  as  I  have  shown,  was  a  very 
much  larger  figure.  Precisely  the  same  was  true 
of  1 91 6.     The  paper  currency  had  actually  de- 


IS8  CURRENCY  INFLATION 

creased.  If  we  were  living  under  ''currency  infla- 
tion," it  must  have  been  inflation  in  the  form  of 
gold.  But  an  increase  in  the  proportion  of  gold 
to  the  total  currency  of  a  country  is  commonly 
accepted  as  evidence  of  financial  sotmdness. 
These  very  significant  statistics  prove  that  Amer- 
ican finance  was  not  imder  the  influence  of  such 
inflated  paper  currency  as  existed  in  belligerent 
Europe.  They  prove  that,  in  so  far  as  changes 
in  this  country's  money  supply  were  a  factor  in 
the  industrial  and  financial  movement,  it  was  the 
increase  in  our  stock  of  gold  which  did  the  work. 
This,  however,  does  not  put  an  end  to  discus- 
sion about  the  future.  In  the  first  place,  the  very 
fact  that  the  new  banking  system's  large  poten- 
tial facilities  for  increasing  currency  and  credits 
had  not  yet  been  invoked  is  proof  that  the 
possibility  of  using  them,  and  conceivably  of 
misusing  them,  remained.  From  this  we  are  pri- 
marily protected,  as  the  conservative  central 
banks  of  Europe  have  always  been,  by  the  large 
experience  and  the  sober  conception  of  their 
duties  on  the  part  of  the  men  who  direct  the 
Federal  Reserve,  and  by  the  very  great  restrictive 
power  over  the  system's  credit  and  currency  facil- 
ities which  the  law  has  conferred  upon  them. 
But  in  the  second  place,  quite  aside  from  the 
question  of  actual  expansion  of  paper-money  is- 
sues, there  will  remain,  imtil  the  period  of  post- 


OUR  GOLD  SUPPLY  AFTER  WAR  159 

bellum  readjustment  is  well  under  way,  the  un- 
certainty as  to  the  permanency  of  our  present 
gold  reserve.  In  so  far  as  these  huge  additions 
to  our  stock  of  gold,  like  the  international  capital 
which  they  represent,  have  come  to  this  country 
for  safe-keeping  in  war  time,  it  cannot  be  certain 
how  much  of  it  will  be  retained  when  the  war  is 
over  and  when  Europe  will  do  its  best  to  draw 
gold  from  the  United  States. 

Theoretically,  it  cotdd  accomplish  that  purpose 
by  such  enormous  export  of  merchandise  to  Amer- 
ica as  should  turn  the  foreign  exchanges  against 
us.  It  could  do  it  through  similarly  large  sales  of 
its  own  securities  to  New  York.  Or  it  could  get 
the  gold  by  maintaining  such  high  money  rates 
on  European  markets,  in  the  face  of  easy  money 
here,  that  large  amotints  of  capital,  now  put  out 
on  loan  in  this  country,  would  be  withdrawn  and 
offered  at  the  higher  rates  in  Europe. 

These  are  all  possibilities;  it  is  therefore  a 
theoretical  possibility  that  so  much  gold  would 
be  drawn  away  as  to  deplete  our  own  bank  re- 
serves and  disturb  our  markets  seriously.  It  is  ex- 
tremely doubtful,  however,  in  my  judgment, 
whether  these  results,  in  such  shape  as  to  create 
actual  embarrassment,  can  be  described  as  prob- 
abilities. Europe  cannot  reverse  our  balance  of 
trade  in  merchandise,  unless  its  own  need  of 
American   products   decreases   very   greatly,    or 


/ 


i6o  CURRENCY  INFLATION 

unless  wages  of  European  labor  can  be  put  down 
again  so  as  to  undersell  our  manufacturers.  Eu- 
rope will  undoubtedly  succeed  in  selling  large 
amounts  of  securities  in  America  after  peace;  but 
America  is  not  compelled  to  buy  any  more  of 
them  than  is  prudent. 

As  for  the  question  of  a  high  bid  through  Euro- 
pean money  rates,  it  is  at  least  an  open  question 
whether  money  will  be  high  or  low  in  Europe 
when  the  war  is  over.    Hard  times  and  prolonged 
industrial  depression  in  the  present  belligerent 
communities  will  follow  this  war,  as  they  followed 
the  Napoleonic  wars,  and  industrial  depression 
does  not  favor  high  money  rates.     Furthermore, 
even  if  London  and  Paris  and  Berlin  were  to  bid 
for  our  gold  in  this  manner,  it  would  remain  to 
see  what  response  our  own  money  markets  would 
make,  imder  the  influence  of  the  Federal  Reserve 
Banks,  which  have  large  powers,  through  their 
s  control  over  our  own  money  markets,  to  regulate 
>J^and  restrain  the  movement  of  our  gold.    That  will 
J  S  possibly  be  the  first  occasion  when  the  power  of 
3  J    this  novel  institution  in  our  financial  history  will 
be  fully  tested. 
^^  The  special  problems  which  inflated  and  depreci- 
ated currencies  will  create  for  Europe,  when  the 
war  is  over,  are  far  more  formidable.    One  of  the 
highest  French  economic  authorities  predicted, 
during  191 5,  that  ten  years  would  probably  be 


PAPER  MONEY  IN  SMALL  SUMS     i6i 

needed  to  bring  the  currency  of  France  back  to  a 
normal  basis.  Germany  will  be  confronted,  not 
only  with  her  hugely  expanded  imperial  bank-note 
issues,  but  with  the  makeshift  currency  of  the 
**loan  banks."  In  our  Civil  War,  depreciation  of 
the  paper  currency  drove  out  of  circulation,  first 
the  gold  and  then  the  small  silver  currency. 
When  our  people  had  been  reduced  to  the  use  of 
postage-stamps  in  making  petty  payments,  the 
government  intervened  with  issues  of  paper  notes 
for  fractions  of  a  dollar.  On  the  European  Con- 
tinent a  precisely  similar  evidence  of  depreciation 
made  its  appearance  during  191 5. 

In  France,  for  instance,  municipalities  put  out 
paper  notes  for  a  franc  or  less,  convertible  into 
notes  of  the  Bank  of  France.  All  this  structure 
of  inflated  ciurency  must  be  taken  in  hand  by  the 
European  governments  when  war  is  over.  The 
process  will  be  economically  difficult — ^not  only 
because  contraction  after  inflation  is  always  a 
trying  experience,  but  because  resumption  of  gold 
payments  on  a  depreciated  ciurency  is  usually 
effected  through  large  governmental  loans,  whereas 
the  strain  on  the  public  credit  of  the  present  bellig- 
erents has  been  quite  unprecedented.  To  what 
extent  the  accumulations  of  gold,  obtained  by 
continental  governments  through  the  volimtary 
action  of  their  citizens,  will  serve  to  facilitate  or 
hasten  the  subsequent  return  to  specie  payments. 


i62  CURRENCY  INFLATION 

is  itself  a  matter  of  conjecture.  These  new  gold 
reserves  may  be  needed  for  other  purposes  also. 
The  outcome  will  in  all  probability  be  a  finan- 
cial chapter  such  as  will  cover  many  years  after 
retiun  of  peace.  It  will  not  be  the  less  interesting 
a  chapter  in  economic  history,  when  it  is  prac- 
tically a  certainty  that  at  least  a  great  part  of  the 
needlessly  large  war-time  accumulation  of  gold  in 
the  United  States  will  in  due  coiirse,  and  probably 
to  our  own  financial  advantage,  move  back  to 
Europe. 


CHAPTER  IX 
THE  FOREIGN  EXCHANGES 

NOTHING  in  the  economic  history  of  this 
war  has  been  more  profoimdly  interesting 
than  the  action  of  the  foreign  exchanges. 
The  unprecedented  scope  of  the  movements  which 
occurred  with  such  swiftness  and  violence  in  191 5, 
not  only  threw  fresh  light  on  the  principles  of 
economic  science,  but  in  the  popular  view  a  wide 
political  significance  was  imputed  to  them.  What 
was  described  as  the  sensational  depreciation  of 
exchange  on  Germany  in  the  neutral  markets  of 
the  world,  those  neutral  markets  accepted  very 
generally  as  evidence  of  rapidly  increasing  weak- 
ness in  Germany's  position.  When  exchange  on 
London  at  New  York,  a  few  months  later,  suffered 
a  similar  spectacular  depreciation,  the  inference 
was  widely  drawn  that  the  financial  strain  of  war 
on  England  had  approached  the  breaking-point. 
However  much  these  popular  assimiptions  may 
have  exaggerated  the  economic  situation,  and 
notwithstanding  the  rejection  of  them  by  econ- 
omists in  the  nations  immediately  concerned, 
the  governments  showed  grave  imeasiness.     Of- 

163 


i64      THE  FOREIGN  EXCHANGES 

ficial  action,  sometimes  of  a  character  new  to 
economic  history,  was  taken  to  arrest  the  move- 
pent.  Not  only  was  the  pubhc  credit  employed 
for  this  purpose,  but  in  two  of  the  most  powerful 
belligerent  states,  the  investment  securities  of 
private  citizens  were  taken  into  control  of  the 
national  treasury  and  sold  or  pledged  by  the 
government  to  regulate  the  foreign  exchanges. 

To  the  ordinary  observer  of  events,  the  foreign 
exchange  market  is  always  apt  to  seem  a  net- 
work of  bewildering  technicalities.  Most  well- 
informed  people  know,  in  a  general  way,  that  an 
emphatic  movement  of  exchange  rates  against  a 
given  coimtry,  on  the  other  great  money  markets 
of  the  world,  is  a  sign  that  financial  conditions  in 
that  coimtry,  and  sometimes  political  conditions, 
are  unfavorable.  Such  action  of  the  foreign  ex- 
change market  is  recognized  as  a  sign  that  in- 
vested capital  is  leaving  the  country.  Every  one 
at  all  familiar  with  business  affairs  is  also  aware 
that  a  great  increase  of  a  country's  export  trade, 
in  a  given  season,  helps  toward  the  favorable 
movement  of  the  foreign  exchanges,  and  that 
decreased  exports  will  have  the  opposite  effect. 
But  beyond  these  very  general  conceptions,  the 
exchange  market  is  quite  commonly  regarded  as 
an  intricate  puzzle,  which  may  as  well  be  left  for 
discussion  by  specialists. 

Yet  the  principles  which  underlie  the  fluctu- 


PRINCIPLES  INVOLVED  165 

ations  of  foreign  exchange  are  in  reality  very 
simple,  and  my  reason  for  reviewing  them  here  is 
that  the  meaning  of  the  remarkable  war-time 
phenomena  of  19 14  and  191 5  can  be  tmderstood 
only  through  clear  insight  into  the  actual  machin- 
ery of  the  market.  The  intrinsic  value  of  the 
British  sovereign  in  American  money  being 
$4.86f^,  of  the  French  franc  19.3  cents,  and  of 
the  German  mark  23.8  cents,  those  values  neces- 
sarily represent  the  normal  parity  at  which  such 
European  currencies  may  be  exchanged  for  Amer- 
ican dollars.  When  payments  due  from  the  Amer- 
ican to  the  English  market,  for  example,  equally 
balance  the  payments  due  from  England  to  the 
United  States,  the  rate  of  exchange  on  the  open 
market  will  be  the  intrinsic  parity  of  $4.86^^  to 
the  pound  sterling.  In  such  case  the  total  simi  of 
drafts  by  each  market  on  the  other  would  be 
exactly  equivalent  to  the  credits  available  in  each 
market  for  accoimt  of  the  other.  But  if  payments 
due  from  one  side  are  greater  than  from  the  other, 
the  more  largely  indebted  market  must  then,  in 
order  to  make  remittances,  bid  for  drafts  of  in- 
ternational bankers  on  their  private  funds,  and 
the  rate  asked  by  them  will  vary  from  the  par  of 
exchange  in  proportion  as  demand  for  ordinary 
trade  remittances  exceeds  supply. 

Such  excess  of  payments  due  from  one  market 
to  the  other  might  be  met  by  sending  gold.    But 


i66       THE  FOREIGN  EXCHANGES 

in  sending  gold,  the  banker  must  reckon  up  the 
cost  of  freight,  insurance,  and  loss  of  interest  on 
the  gold  while  in  transit.  He  can  afford  to  send 
it  only  when  the  rate  bid  by  merchants,  for  the 
drafts  on  the  credit  established  by  the  gold,  has 
varied  so  far  from  intrinsic  parity  that  the  differ- 
ence will  cover  the  cost  of  shipment.  That  rate 
is  known  in  the  market  as  the  **gold  point." 
Whereas  the  par  of  American  exchange  on  Lon- 
don is  $4.86^  to  the  poimd  sterling,  a  rate  of 
about  $4.83 >4  is  the  point  at  which  gold  can 
ordinarily  be  sent  from  London  to  New  York. 
The  exchange  banker  contracts  to  give  to  his 
London  clients,  in  the  form  of  a  New  York  *' dollar 
credit,"  about  three  cents  less,  for  every  pound 
sterling  paid  to  him  at  London,  than  the  exported 
English  gold  will  exchange  for  at  New  York.  The 
three  cent  discount  measures  the  cost  of  ship- 
ping it.  So  long,  therefore,  as  gold  is  freely  sup- 
plied in  ordinary  times  by  banks  of  a  given  country 
to  their  large  depositors,  the  inequality  of  pay- 
ments due  between  two  markets  cannot  force  any 
larger  variation  of  exchange  rates  from  parity. 
The  debit  or  credit  balance,  as  the  case  may  be, 
will  be  adjusted  by  export  of  gold  from  one  market 
to  the  other. 

These  principles  lie  at  the  root  of  the  whole 
remarkable  episode  of  191 5  in  the  foreign  ex- 
change market.    What  happened  was  that  New 


BREAK  IN  STERLING  RATES   167 

York  exchange  on  London  instead  of  stopping  at 
the  normal  "gold  point'*  of,  say  $4.83 K  (which  it 
reached  in  January,  191 5),  fell  by  the  middle  of 
February  to  $4.79,  a  figure  never  reached  before, 
except  for  a  moment  in  the  disastrous  panic  of 
1857.  At  the  end  of  June  it  had  touched  $4.76; 
at  the  opening  of  September  it  was  quoted  at  the 
extraordinary  rate  of  $4.50,  with  some  transac- 
tions reported  as  low  as  $4.48.  This  was  the 
furthest  point  to  which  the  exchange  market  went 
in  its  abnormal  movement  against  London.  But 
it  represented  a  depreciation  of  nearly  8  per  cent, 
and  was  a  wholly  impossible  rate  if  international 
credit  and  international  exchange  of  gold  were  on 
the  footing  of  normal  times.  But,  exceptionally 
violent  as  was  this  movement  of  exchange  on 
London,  quoted  in  the  greatest  neutral  market,  the 
other  belligerent  states  had  worse  conditions  to 
confront  in  foreign  exchange.  As  against  the  8 
per  cent  depreciation  in  New  York  exchange  on 
London,  the  New  York  rate  on  Paris  at  one  time 
in  1 91 5  recorded  a  depreciation  of  17^^  per  cent, 
while  the  rate  on  Berlin  was  quoted  25  J^  per  cent 
below  normal  parity.  Austrian  exchange  sold 
at  a  discount  of  40/^  per  cent,  Russian  exchange 
at  a  discount  of  nearly  60. 

What,  then,  was  the  actual  economic  meaning 
of  so  remarkable  and,  for  the  belligerent  coimtries 
so  general,  an  adverse  movement  of  exchange? 


i68       THE  FOREIGN  EXCHANGES 

In  the  case  of  England  and  France,  their  purchases 
from  the  United  States,  first  of  grain  and  then  of 
war  munitions,  created  so  huge  a  surplus  of  mer- 
chandise imports  over  exports  that  the  pendulimi 
of  exchange  was  bound  to  swing  heavily  against 
their  markets.  Nor  did  the  immensely  increased 
import  trade  of  the  two  European  belligerents 
from  America  tell  the  whole  story  of  the  **mer- 
chandise  balance.'*  While  such  imports,  during 
191 5,  ran  something  like  $700,000,000  beyond 
1 913,  the  last  preceding  year  of  peace,  the  export 
trade  of  the  belligerent  coimtries  decreased  with 
similar  rapidity.  Their  productive  energies  were 
curtailed  by  the  heavy  drain  on  able-bodied  labor, 
first  by  the  army  and  then  by  the  mimitions  fac- 
tories; so  that,  from  this  and  other  causes,  mer- 
chandise exports  from  England  alone  decreased 
from  1913  no  less  than  $700,000,000,  or  26  per 
cent. 

The  course  of  events  in  France  was  pre- 
cisely similar.  This  imparalleled  increase  in  an- 
nual payments  due  on  merchandise  account  to 
the  outside  world  in  general,  and  to  the  United 
States  in  particular,  occurred  at  the  moment  when 
the  supply  of  remittances  from  America,  to  pay 
for  the  $200,000,000  or  more  per  annum  in  the 
expenditure  of  American  tourists,  had  been  sud- 
denly and  almost  completely  cut  off  by  the  war, 
and  when  the  transfer  of  capital  from  London  to 


LONDON  AND  NEW  YORK        169 

New  York — especially  balances  owned  by  mer- 
chants or  bankers  with  headquarters  in  other 
markets — ^was  reaching  large  proportions.  We 
have  already  seen  how  London's  partial  abandon- 
ment of  its  ftmctions  as  the  money  centre  of  the 
world  made  this  shifting  of  capital  inevitable. 
But  every  such  transfer  necessitated  further  in- 
crease in  the  demand  for  drafts  on  New  York,  and 
emphasized  the  balance  adverse  to  London  in  the 
exchange  market.  The  movement  was  greatly 
stimulated  by  the  contrast  between  the  war  taxes 
and  restrictions  on  investment  which  were  imposed 
on  capital  at  London,  and  the  free  opportunity 
for  its  use  in  a  prosperous  and  peaceful  market, 
which  New  York  presented.  The  "balance  of 
trade"  against  France  and  England  had  never 
been  so  great  in  their  history. 

Still,  it  will  be  remarked  that  in  the  case  of  Eng- 
land (and  the  same  was  true  of  all  the  other 
beUigerents)  the  actual  rate  at  which  their  cur- 
rency exchanged  in  191 5  for  that  of  a  prosperous 
neutral  state  was  a  rate  which  would  have  been 
impossible  if  gold  had  been  exported  in  such  quan- 
tity as  to  make  good  the  international  balance. 
It  followed  necessarily,  therefore,  either  that  gold 
was  not  thus  exported  or  that  it  was  not  shipped 
in  suiBficient  quantity.  As  a  matter  of  fact,  Lon- 
don alone  continued  to  export  gold  at  all,*  to 
meet  its  commercial  indebtedness  abroad.    I  have 


I70       THE  FOREIGN  EXCHANGES 

shown  in  a  previous  chapter  how  large  were  these 
shipments  to  New  York  on  England's  account; 
in  1915  they  exceeded  $300,000,000;  in  1916  they 
were  even  larger.  But  they  were  evidently  not 
large  enough.  The  $61,000,000  gold,  for  instance, 
imported  by  the  United  States  in  August,  1915, 
and  mostly  sent  from  those  two  quarters,  was 
far  from  sufficient  to  restore  the  international 
balance  and  prevent  exchange  from  touching  the 
most  imfavorable  rate  of  all  at  the  opening  of 
September.  It  is  questionable  whether  gold 
enough  to  correct  by  itself  the  disparity  in  ex- 
change could  have  been  obtained  in  London  with- 
out virtually  exhausting  the  reserve  of  the  Bank 
of  England.  Therefore,  other  means  had  to  be 
employed  to  correct  the  depreciation  in  exchange. 
In  September  the  British  Government  sent  to 
this  country  a  commission  of  eminent  financiers, 
with  the  purpose  of  floating  here  a  loan  of  large 
proportions.  Originally,  the  commissioners  pro- 
posed that  the  American  investment  markets  pin*- 
chase  $1,000,000,000  worth  of  five-year  bonds, 
guaranteed  jointly  by  the  English  and  French 
Governments.  Bankers  before  whom  this  pro- 
posal was  laid  demurred  to  the  amount.  The  sum 
was  very  large;  even  the  United  States  Govern- 
ment had  never  in  its  histoi;^  asked  for  that  much 
in  a  single  loan  from  investors  of  this  country. 
Furthermore,  our  investors  were  not  familiar  with 


THE  ANGLO-FRENCH  LOAN       171 

foreign  securities.  The  entire  proposal  was  vig- 
orously opposed  by  pro-German  interests;  there 
was  talk  even  of  a  protest  from  the  German 
embassy.  The  amovint  applied  for  was  finally  re- 
duced to  $500,000,000. 

On  the  other  hand,  the  terms  of  the  loan  em- 
bodied remarkable  concessions.  It  was  to  pay  5 
per  cent  interest,  as  against  the  4K  per  cent  rate 
of  the  latest  British  domestic  war  loan  and  the 
2K  per  cent  rate  of  the  old  consols;  it  was  offered 
at  96,  as  against  a  price  of  par  for  the  recent 
war  loan.  With  five  years  to  run,  the  loan  was 
to  be  payable,  interest  and  principal,  in  Amer- 
ican gold  coin  in  this  country.  Unlike  all  previous 
British  Government  loans,  it  was  to  be  exempt 
from  the  English  income  tax.  When  it  was  con- 
sidered that,  almost  within  a  year.  Great  Britain 
had  placed  a  new  loan  at  3  per  cent  and  France 
a  loan  at  3/^,  the  concessions  were  very  note- 
worthy. 

Yet  they  had  seemed  to  be  called  for  by  the 
situation.  Even  among  people  who  were  in  sym- 
pathy with  England  in  the  war,  there  was  much 
discussion  of  whether  so  huge  a  diversion  of 
American  capital  to  a  foreign  investment  might 
not  affect  our  own  markets  adversely,  and  whether 
the  strain  on  England'^financial  resources  might 
not  impair  the  soimdness  of  this  loan.  In  many 
minds,  the  depreciation  of  exchange  on  London 


172       THE  FOREIGN  EXCHANGES 

was  imagined  to  reflect  depreciation  of  the  Eng- 
lish Government's  public  credit. 

It  was  these  apprehensions  which,  at  the  out- 
set, threw  on  the  prospect  of  a  successful  public 
subscription  to  so  great  a  loan  sufficient  doubt  to 
make  unusually  attractive  terms  an  essential  re- 
course. A  week  or  two  of  discussion  cleared  up  a 
good  deal  of  misunderstanding.  The  public  began 
to  realize  that  when  the  British  Government  had 
just  raised  $3,000,000,000  on  a  single  loan  at 
home,  and  had  added  $1,500,000,000  to  England's 
annual  budget  of  taxation,  it  was  hardly  to  be 
supposed  that  it  could  not,  even  without  the  joint 
guarantee  of  France,  provide  for  a  $500,000,000 
foreign  loan.  That  the  fall  in  foreign  exchange 
on  London  did  not  mean  England's  inability  to 
pay  its  foreign  debts,  but  merely  its  inability  to 
meet  them  through  gold  exports,  began  to  be  un- 
derstood. So  did  the  fact  that  even  suspension 
of  gold  redemption  for  the  currency  would  not 
signify,  with  England  of  191 5  any  more  than  with 
the  United  States  of  1865,  that  the  government 
could  not  easily  pay  in  gold  the  interest  and  prin- 
cipal on  its  public  debt.  The  loan  was  floated 
successftdly  during  the  autumn  months  of  191 5. 

It  was  clearly  avowed,  while  the  negotiations 
were  in  progress,  that  the  purpose  of  the  $500,- 
000,000  loan  was  to  stop  the  depreciation  of  ex- 
change on  London.     It  was  not  understood  by 


/ 


RECOVERY  IN  STERLING         173 

everybody,  even  then,  how  the  loan  could  have 
that  effect.  The  principle  involved  was,  however,  y 
plain  enough.  The  violence  of  the  adverse  move-  X 
ment  in  exchange  had  been  caused  very  largely 
by  the  payments  made  from  London  to  New  York 
for  the  British  Government's  purchases  of  war 
material.  The  drafts  on  London  for  that  purpose 
had  completely  upset  the  market  for  international 
exchange.  Now,  with  a  $500,000,000  credit  es- 
tablished in  the  United  States,  as  a  result  of  the 
new  loan,  the  British  and  French  Governments 
might  pay  the  mtmition  bills  up  to  that  amount, 
not  with  drafts  on  London  but  with  checks  on  the 
American  banks  in  which  the  proceeds  of  the  loan 
had  been  deposited.  To  that  extent  the  imwieldy 
surplus  of  bills  of  exchange  drawn  against  Lon- 
don was  boimd  to  be  reduced.  The  rate  of  ex- 
change, in  fact,  moved  at  once  in  London's  favor, 
going  in  a  very  short  time  from  $4.50  to  a  fraction 
above  $4.75,  around  which  slightly  depreciated 
level  it  remained  throughout  the  ensuing  twelve- 
month. 

From  the  view-point  of  exchange  on  London, 
then,  the  Anglo-French  loan  achieved  its  purpose. 
It  did  not  have  the  predicted  adverse  effect  on 
our  own  investment  market  or  on  the  New  York 
money  rate;  but  for  this  one  reason  was,  that  the 
proceeds  were  deposited  with  American  banks 
imtil  the  British  Government  should  draw  on 


174      THE  FOREIGN  EXCHANGES 

them  to  make  its  payments,  and  that  when  it  did 
thus  draw,  the  money  was  transferred  from  Amer- 
ican deposit  banks  to  American  manufacturers. 
The  argument  that  the  loan  was  not  a  sure  and 
safe  investment,  that  the  borrowing  governments 
might  perhaps  not  be  able  to  pay  it  at  maturity, 
lasted  longer  than  the  other.  This  notion  was  a 
not  wholly  unnatiural  outgrowth  from  the  be- 
wildering evidence  of  economic  strain,  as  the  war 
continued.  No  argument,  however,  could  well 
have  been  more  absurd.  Seeing  that  interest  and 
principal  were  expressly  made  payable  in  gold 
and  at  New  York,  fulfilment  of  the  contract  was 
necessarily  a  measure  of  the  international  solvency 
of  the  two  great  borrowers.  In  effect,  even  if  not 
in  form,  this  loan  for  $500,000,000  was  a  first 
lien,  not  only  on  the  thrifty  French  Republic 
but  on  the  British  Empire,  and  on  the  total  re- 
sotu-ces  of  those  English  citizens  who  added  $1,- 
500,000,000  to  their  annual  tax-roll  during  the 
first  two  years  of  war. 

In  cotirse  of  time,  the  credit  balance  thus  es- 
tablished in  America  was  drawn  down  by  the 
accruing  payments  for  munitions.  The  London 
bankers  provided  for  this  condition  in  advance  by 
raising  a  $50,000,000  loan  on  their  own  accotmt 
from  New  York  bankers,  and  by  drawing  on  this 
fund  also,  whenever  the  rate  of  exchange  showed 
signs  of  once  more  moving  against  London.    A 


ENGLAND'S  INVESTMENTS        175 

few  months  later  the  British  treasury  intervened 
with  a  very  remarkable  undertaking.  Something 
of  the  adverse  balance  of  exchange  had  been  met 
through  sales  by  English  investors  of  their  Amer- 
ican securities  to  New  York.  Up  to  the  middle 
of  1916,  $1,500,000,000  of  these  stocks  and  bonds 
were  believed  to  have  been  thus  resold.  From  time 
to  time,  however,  the  selling  movement  slack- 
ened; it  began  to  seem  as  if  the  English  investor 
was  disposed  to  keep  what  was  left. 

A  thorough  and  careful  estimate  by  an  American 
railway  president,  based  on  investigation  of  the 
amoimt  of  our  railway  sectuities  which  were  reg- 
istered in  foreign  names  and  reported  under  the 
income-tax  provisions,  indicated  that  $2,223,500,- 
000  of  them  were  still  owned  abroad  in  the  mid- 
dle of  191 5.  At  least  $1,750,000,000  must  have  re- 
mained in  foreign  hands  at  the  end  of  the  year,  in 
addition  to  an  amotmt  of  our  industrial  securities 
perhaps  one-half  as  great;  and  English  investors 
undoubtedly  owned  the  bulk  of  them.  Early  in 
1 91 6  the  British  Government  appealed  to  such 
English  holders  to  sell  all  their  American  securities 
to  the  government  at  prices  close  to  those  of  the 
current  market,  or  to  lend  them  to  the  treasury, 
for  the  period  of  war  and  on  stipulated  terms. 

The  obvious  purpose  was  to  place  the  govern- 
ment itself  in  a  position  enabling  it  to  insure  the 
sale  of  these  sectuities  in  New  York  whenever  its 


176      THE  FOREIGN  EXCHANGES 

New  York  credit  balance  needed  to  be  increased, 
or  to  use  the  securities  as  a  basis  on  which  to  bor- 
row in  New  York.  Both  expedients  were  largely 
utilized.  The  French  Government,  following  suit, 
collected  from  its  own  citizens  a  mass  of  foreign 
securities,  large  enough  to  serve  as  collateral  for 
a  loan  of  $100,000,000  in  New  York.  So  far  was 
the  imdertaking  carried  by  Great  Britain  that, 
later  in  191 6,  the  already  very  high  income  tax 
was  increased  by  10  per  cent  in  the  case  of  income 
derived  from  certain  foreign  securities ;  this  for  the 
purpose,  plainly  avowed  by  the  government  itself, 
of  forcing  holders  of  such  stocks  and  bonds  to  de- 
liver them  to  the  treasury,  whether  they  wished 
to  give  them  up  or  not.  The  immediate  sequel  to 
this  action,  and  to  the  large  deposits  of  such 
securities,  was  the  borrowing  by  the  British  Gov- 
ernment in  this  cotmtry,  during  August,  19 16,  of 
$250,000,000,  secured  by  pledge  with  a  New  York 
trust  company  of  $100,000,000  American  stocks 
and  bonds,  $100,000,000  Canadian  securities,  and 
$100,000,000  bonds  of  neutral  states. 

This  series  of  extraordinary  economic  measures, 
applied  by  England  and  France  to  offset  the  potent 
influences  operating  to  depreciate  their  exchange 
markets,  achieved  their  purpose  in  the  case  of 
England  to  the  extent  of  cancelling  the  greater 
part  of  that  depreciation  and  holding  the  exchange 
rate  steady.    In  the  case  of  France,  the  effort  was 


THE  CASE  OF  FRANCE  177 

less  successful;  the  improvement  of  exchange, 
after  the  most  unfavorable  rate  had  been  touched 
early  in  191 6,  still  left  the  market,  in  the  middle  of 
that  year,  at  a  discoimt  of  14  or  15  per  cent  from 
parity.  The  failure  to  accomplish  the  desired  re- 
sult may  doubtless  be  ascribed  in  large  degree  to 
the  fact  that  the  French  market  lacked  the  eco- 
nomic resources  of  England ;  in  particular,  that  its 
holdings  of  American  securities,  available  for  sale 
on  the  New  York  market,  were  trifling  in  compar- 
ison with  those  of  England — for  years  a  habitual 
investor  on  an  enormous  scale  in  our  stocks  and 
bonds. 

But  another  important  influence,  which  did  not 
prevail  at  London,  operated  at  Paris  to  prevent 
correction  of  the  depreciation  in  exchange.  This 
was  the  fact  that,  since  French  paper  bank-note 
cturency  had  been  prodigiously  inflated,  and 
since  redemption  of  that  currency  in  gold  had 
been  tacitly  abandoned,  the  foreign  exchange  rates 
must  have  reflected  not  only  the  abnormal  **  trade 
balance*'  against  the  French  Republic,  not  only 
the  flight  of  foreign  capital,  and  not  only  loss  of 
the  annual  drafts  on  New  York  banks  to  pay  for 
American  tourists*  expenditures,  but  an  actual 
depreciation  of  the  currency.  It  was  exchange 
on  Berlin,  however,  whose  movement  brought 
this  aspect  of  the  economic  situation  into  sharpest 
controversy. 


178      THE  FOREIGN  EXCHANGES 

German  exchange,  as  I  have  shown,  was  more 
seriously  depreciated  than  exchange  on  either 
London  or  Paris.  As  against  its  intrinsic  value  of 
2sPi  cents  in  American  currency,  the  exchange 
value  of  the  German  mark  fell  to  17K  cents  in 
1 91 5.  Recovering  slightly  from  that  very  de- 
preciated level,  the  rate  fell  lower  still  in  191 6, 
and  the  market  for  Austrian  exchange  moved 
similarly.  The  actual  situation  of  Germany's 
foreign  trade,  during  the  war,  was  such  as  to  make 
somewhat  less  simple  the  explanation  for  this 
movement  of  exchange.  Whereas  one  perfectly 
obvious  reason  for  the  depreciation  of  English 
and  French  exchange  was  the  enormous  war-time 
** balance  of  merchandise  trade"  against  those 
nations,  the  ocean  trade  of  Germany  virtually 
ceased  in  the  early  autumn  of  19 14,  when  her 
ships  were  driven  from  the  sea  and  her  ports 
blockaded  by  the  English  fleet. 

It  has  been  a  very  general  contention,  on  the 
part  of  German  economists  and  financiers,  that 
this  embargo  on  the  country's  foreign  trade  ac- 
counts for  the  fact  that  exchange  depreciated 
more  violently  and  persistently  at  Berlin  than  at 
Paris  or  London.  A  common  saying,  in  the  for- 
eign exchange  market  itself,  was  that  the  absence 
of  international  trade  in  merchandise  made  the 
market  for  New  York  exchange  on  Germany 
purely  "nominal,"  because  there  were  virtually  no 
commercial  transactions  on  which   to  base  the 


GERMANY'S  POSITION  179 

rate.  But  this  is  scarcely  a  valid  explanation; 
the  exchange  was  equally  depreciated  in  every 
other  great  neutral  market  of  the  world.  Even 
supposing  Germany's  foreign  trade  to  have 
ceased  entirely,  bankers*  drafts  between  Berlin 
and  neutral  markets  (by  wireless  telegraph  or 
otherwise)  would  still  be  feasible.  The  deter- 
mining influence  on  exchange  rates  would  still, 
therefore,  be  the  excess  of  payments  actually 
made  between  Germany  and  those  outside  mar- 
kets. If  Germany  had  in  time  of  peace  been  ac- 
customed to  export  more  merchandise  than  she 
imported,  cessation  of  that  trade  would,  ipso 
factOy  operate  to  her  disadvantage  on  exchange. 
But  the  case  was  precisely  opposite  with  Ger- 
many's foreign  trade  in  time  of  peace;  imports 
largely  exceeded  exports. 

While,  moreover,  the  depreciation  in  English 
and  French  exchange  was  largely  attributable  to 
enormous  piu*chases  of  war  material  in  America, 
that  influence  at  any  rate  was  wholly  absent  in  the 
case  of  Germany.  The  Western  hemisphere  could 
not  have  sent  munitions  to  Hamburg  or  Bremen, 
however  much  it  might  have  desired  to  do  so. 
To  the  extent,  therefore,  that  payments  for  these 
"mtmitions  shipments"  were  a  factor  in  exchange, 
the  New  York  rate  on  Berlin  should  have  depreci- 
ated less,  not  more,  than  the  rate  on  London  or 
Paris. 

Notwithstanding  the  many  cross-currents  and 


i8o       THE  FOREIGN  EXCHANGES 

unseen  influences  bearing  on  international  ex- 
change, it  is  impossible  to  escape  the  conclusion 
that  the  depreciation  in  the  German  rate  measured 
largely,  and  in  fact  primarily,  depreciation  of  the 
German  currency.  I  have  shown  in  a  previous 
chapter,  while  discussing  the  actual  status  of 
that  currency,  the  reasons  why  the  currency  was 
depreciated,  and  why  such  depreciation  was 
boimd  to  reflect  itself  in  the  foreign  exchange 
market.  Briefly  summed  up,  the  well-known  facts 
are,  that  Germany's  paper  cinrency  had  been 
enormously  inflated;  that  redemption  in  gold, 
even  of  imperial  bank-note  issues,  was  suspended 
when  the  war  began;  that  an  actual  premium  was 
apparently  at  one  time  bid  on  gold;  that  such 
bids  were  then  made  a  penal  offense  by  the  Ger- 
man Government;  that  the  American  purchaser 
of  a  draft  payable  at  Berlin  knew,  therefore,  that 
the  draft  would  be  paid,  not  in  gold  or  its  equiva- 
lent, but  in  paper  currency,  irredeemable  to-day 
and  with  no  future  date  assigned  for  its  redemp- 
tion. 

All  of  these  facts  being  perfectly  understood  in 
the  exchange  market,  it  would  be  on  its  face  in- 
credible that  an  American  banker,  purchasing 
such  a  draft  with  American  money  redeemable  in 
gold,  should  pay  for  it  what  he  paid  when  he  could 
get  gold  in  return  for  it  at  Berlin.  In  a  closely 
parallel  historic  instance,  when  the  Bank  of  Eng- 


AN  OLD  PRECEDENT  i8i 

land,  in  the  Napoleonic  War,  had  suspended  gold 
redemption  of  its  notes,  and  when  exchange  on 
London  at  important  foreign  cities  had  gone  to 
20  per  cent  discount,  there  were  merchants  who 
protested  that  the  whole  depreciation  was  due 
to  Napoleon's  embargo  on  English  trade  with 
northern  Europe.  A  very  eminent  banker,  tes- 
tifying before  a  parliamentary  committee,  thought 
otherwise.  Although  the  depreciation  in  ex- 
change might  have  originally  occurred  **in  con- 
sequence of  the  measures  of  the  enemy,"  he 
ascribed  "its  not  having  recovered  to  the  circum- 
stance of  the  paper  of  England  not  being  ex- 
changeable for  cash."  The  committee  indorsed 
this  view,  despite  its  unpopularity  in  commercial 
London;  concluding  that  the  **rise  in  the  market 
price  of  gold  in  this  country,  coupled  with  so 
remarkable  a  depression  in  our  exchanges,  .  .  . 
pointed  to  something  in  the  state  of  our  own 
domestic  currency  as  the  cause  of  both  appear- 
ances." The  case  of  Germany  is  identical,  ex- 
cept that,  imlike  the  England  of  1809,  she  has 
suppressed  the  premium  on  gold  by  law. 

It  has  been  urged,  in  arguments  against  this 
somewhat  obvious  conclusion,  that  the  blockade 
had  prevented  Germany  from  regulating  its  ex- 
change market  through  exporting  gold,  like  Eng- 
land, or  through  placing  loans  with  neutral  states, 
like  both  France  and  England.     But  a  govern- 


1 82       THE  FOREIGN  EXCHANGES 

ment  which  has  formally  suspended  gold  payments 
does  not  usually  export  gold,  even  if  opportunity 
admits,  and  Germany*s  attempt  to  send  gold  in 
moderate  amounts  to  near-by  neutral  markets, 
with  the  view  of  drawing  on  the  fund  thus  estab- 
lished and  supporting  the  exchange  rate,  met  with 
early  failure.  As  for  selling  to  investors  of  neutral 
markets  the  new  government  securities  of  Ger- 
many, the  experiment  was  tried. 

The  German  Government  actually  placed  some 
$25,000,000  of  short-term  notes  in  the  American 
market,  and  efforts  were  made  to  interest  Amer- 
ican investors  in  the  large  German  war  loans. 
But  the  last-named  and  larger  imdertaking  failed 
of  success,  as  an  offer  by  any  other  belligerent, 
of  neutral  participation  on  a  large  scale  in  its 
domestic  war  loans,  would  have  failed.  Such 
participation  in  the  German  war  loans  meant 
that,  since  interest  and  principal  were  payable  at 
Berlin  and  in  current  German  fimds,  the  American 
holder  would  actually  receive  his  interest  only 
after  deducting  the  abnormal  discount  on  ex- 
change. Our  people  were  sometimes  urged  to  in- 
vest on  the  ground  that  the  same  depreciation  in 
exchange  enabled  them  to  buy  the  German  war 
bonds  at  a  lower  figure  than  their  nominal  price 
of  issue  at  Berlin,  and  that  the  post-bellum  re- 
covery of  exchange  to  normal  rates  would  there- 
fore amoimt,  in  the  American  investor's  case,  to  a 


PROBLEMS  OF  THE  FUTURE   183 

great  increase  in  value  of  the  bonds.  But  this 
was  clearly  enough  at  bottom  a  speculation  in 
exchange.  No  one  could  surely  say  what  would 
be  the  status  of  the  German  currency  even  on 
return  of  peace,  and  therefore  nobody  could  pre- 
dict with  confidence  what  the  rate  of  exchange 
would  be. 

But  behind  all  technical  and  specific  causes  for 
the  war-time  movement  of  the  foreign  exchanges 
on  the  belligerent  countries  stands  the  fact  that 
it  must  reflect,  both  actually  and  relatively,  the 
impairment  of  their  economic  resources.  The 
question,  how  long  a  time  will  be  required,  after 
peace,  before  the  economic  effects  of  this  process  of 
depletion  shall  have  been  corrected,  is  one  of  the 
large  economic  uncertainties  of  the  future.  What 
we  know  is  that  France,  Germany,  Austria,  and 
Russia  will  have  to  wrestle  with  that  problem  as 
no  other  great  nations  have  had  to  wrestle  with 
it  since  the  United  States  emerged  from  the  Civil 
War. 


CHAPTER  X 
WHEN  THE  WAR  ENDS 

LONG  before  the  European  War  had  com- 
.  pleted  its  second  year,  the  question  of  how 
it  might  be  ended,  of  what  the  terms  of 
settlement  would  be,  of  how  return  of  peace  would 
affect  the  political  and  economic  situation,  had 
been  anxiously  discussed  by  the  people  of  neutral 
as  well  as  of  belligerent  nations.  The  question  of 
peace  itself  had  drawn  forth  official  utterances 
from  statesmen  of  the  fighting  Powers,  as  early 
as  1 91 5.  The  British  premier,  answering  Parlia- 
mentary inquiries  on  December  8  that  year, 
merely  stated  that  **if  proposals  of  serious  char- 
acter for  a  general  peace  are  put  forth  by  the 
enemy  governments,  either  directly  or  through 
neutral  Powers,  they  will  be  discussed  by  the 
allied  governments."  The  German  chancellor, 
after  an  equally  non-committal  pledge  to  the 
Reichstag,  on  December  9,  of  his  government's 
willingness  to  consider  the  enemy's  appeal,  com- 
plained that  this  enemy  **has  not  approached  us 
with  suggestions  of  peace,"  a  fact  presumably  due 
to  ** self-deception  beyond  compare";   and  that, 

184 


EARLY  IDEAS  AS  TO  PEACE      185 

**so  long  as  belief  that  Germany  is  approaching 
collapse  continues  to  be  the  dominant  idea  in 
enemy  coimtries,  it  would  be  folly  for  Germany  to 
take  the  initiative." 

This  last  remark  referred  to  various  public 
utterances  of  the  enemy,  but  perhaps  especially 
to  the  declaration  of  December  5  in  the  Paris 
Chamber,  by  the  legislative  spokesman  of  the 
French  War  Department,  that  "there  will  be  no 
peace  until  Alsace  and  Lorraine  are  won,  Belgium 
and  Servia  restored,  German  imperialism  and 
Prussian  militarism  put  beyond  the  possibility  of 
resurrection."  There  was  left  by  way  of  peace 
proposals,  after  these  not  very  illtmiinating  utter- 
ances, the  sullen  demands  of  the  Opposition 
party  (notably  at  Berlin)  for  the  government  to 
state  its  explicit  terms,  and  the  performances  of 
the  shipload  of  eccentric  philanthropists  sent  to 
Europe  in  the  summer  of  191 5  by  an  American 
millionaire. 

But  people  familiar  with  history  recalled,  as 
regards  the  Opposition  protests,  that  in  1864 
even  the  Republican  party's  executive  committee 
urged  Mr.  Lincoln  (unsuccessfully)  to  offer  peace 
to  Jefferson  Davis  on  condition  that  deference  to 
the  Constitution  be  professed.  The  grotesque 
incident  of  the  "peace  ship"  could  be  matched  by 
the  visit  to  the  Confederate  capital  of  a  militant 
Northern  clergyman,  with  a  powerful  backing,  to 


1 86  WHEN  THE  WAR  ENDS 

settle  the  Civil  War  through  the  influence  of  the 
Methodist  Church.  Even  the  European  govern- 
ments' public  attitude  of  191 5,  in  regard  to  the 
rumored  proposals  for  peace  negotiations,  was 
fairly  anticipated  when  Napoleon,  rejecting  in 
1 813  the  only  possible  policy  which  could  immedi- 
ately have  ended  that  period's  European  war, 
declared  that  "I  wish  for  peace,  it  is  necessary  to 
the  world";  but  "I  shall  never  make  any  peace 
except  one  suited  to  the  interests  of  my  empire." 
In  short,  the  world  was  merely  witnessing  the 
usual  order  of  events. 

Along  with  the  conflicting  public  utterances 
of  the  statesmen  it  became  increasingly  evident, 
as  the  war  went  on,  how  divergent  were  the  views 
entertained  by  the  world  at  large  regarding  its 
termination.  The  great  body  of  humane  senti- 
ment imdoubtedly  held  the  ground  that  war 
could  not  be  ended  too  soon;  that  the  civilized 
world  must  be  relieved  from  this  frightful  incu- 
bus; that  peace,  however  achieved,  was  a  para- 
moimt  necessity  of  civilization.  There  was  also 
visible,  however,  even  in  peaceful  neutral  com- 
mimities,  a  feeling  that  the  war  ought  not  to  be 
allowed  to  end  until  Germany  should  have  been 
made  to  suffer  the  humiliation  suited  to  a  govern- 
ment which,  for  its  own  ambitious  purposes  and 
tmder  the  domination  of  a  military  cabal,  had 
provoked   such   a   conflict;    whose   violation   of 


^ 


FINANCIAL  OPINION  187 

treaty,  contempt  for  the  recognized  rules  of  mod- 
em war,  burning  of  captured  cities,  exaction  of 
tribute,  use  of  poisonous  gases,  and  murder  of 
non-combatants  on  the  seas,  had  created  a  situa- 
tion in  which  mere  restoration  of  the  status  quo 
ante  helium  would  be  mockery. 

Looking  at  the  situation  from  yet  another 
point  of  view,  financial  and  industrial  markets 
have  seemed  to  change  their  attitude  repeatedly. 
During  the  first  five  or  six  months  of  war,  when 
the  whole  economic  world  was  paralyzed  under 
the  influence  of  the  sudden  cataclysm,  the  single 
opinion  seemed  to  be  that  nothing  could  set  things 
right  but  speedy  return  of  peace.  Presently, 
however,  the  powerful  neutral  states  began  to 
discover  their  own  exceptional  economic  advan- 
tages. New  York  received  from  London  its  tem- 
porarily abandoned  sceptre  of  economic  leader- 
ship. The  world's  supply  of  capital  gravitated  to 
America.  Our  gold  supply,  our  business  activities, 
our  export  trade,  rose  to  imprecedented  magni- 
tude. The  foreign  exchanges  moved  in  a  spec- 
tacular way  in  favor  of  New  York;  then  came  the 
notable  movement  of  American  prosperity. 

The  word  was  passed  about  that  this  prosperity 
was  bound  up  with  the  European  War,  and  that 
what  we  had  most  to  fear,  by  way  of  a  check  to 
that  prosperity,  was  the  return  of  peace.  A  very 
exceptional  confusion  of  judgment  was  the  result. 


X 


1 88  WHEN  THE  WAR  ENDS 

On  the  stock  exchange,  whose  action  is  commonly 
supposed  to  reflect  the  opinion  of  intelligent  busi- 
ness men,  prices  would  advance  one  day  on  mili- 
tary news  which  seemed  to  indicate  shortening 
of  the  war,  yet  break  sharply  the  next  day  on 
nmiors  of  peace  negotiations.  All  this  made  the 
stock  market  as  perplexing  a  measure  of  the  real 
situation  as  were  the  battle  news  and  the  several 
war-office  bulletins,  in  a  month  when  the  furious 
fighting  around  Verdun  alternated  with  reports  of 
tentative  proposals  to  end  the  war. 

The  *' peace  rumors"  were  themselves  confusing. 
In  the  nature  of  the  case,  overtures  for  peace 
had  to  be  of  the  most  roundabout  and  unofficial 
character;  because  any  government  that  should 
publicly  and  officially  ask  what  terms  would  be 
acceptable  to  its  antagonists  would  thereby  sug- 
gest on  its  own  part  military  weakness  or  weari- 
ness of  war.  There  is  little  doubt,  however,  that 
an  effort  at  opening  peace  negotiations  was  made 
through  Austria  and  the  Vatican  in  August,  191 5, 
immediately  after  the  Austro- German  army  had 
defeated  Russia  in  the  Carpathians  and  had  crossed 
the  Russian  border.  In  official  Petrograd,  it  was 
positively  stated  at  the  time  that  offers  of  a 
separate  peace  had  been  made  by  Germany  to 
Russia.  The  report  of  simultaneous  overtures, 
through  Austria  and  the  Vatican  to  the  other 
Allies,  drew  forth  the  French  premier's  declara- 


BERLIN'S  INTIMATION  189 

tion  to  the  deputies,  in  August,  that  recovery  of 
Alsace-Lorraine  and  Belgium  was  the  irreducible 
minimum.  It  is  practically  certain  that  in  De- 
cember, when  the  defeat  of  Servia  had  been  made 
complete,  Prince  von  Biilow  endeavored  to  ar- 
range some  basis  of  negotiation  in  Switzerland. 

Nothing  resulted  from  any  of  these  overtures. 
Nevertheless — ^partly  because  of  doubts  as  to 
what  economic  conditions  would  follow  return  of 
peace,  and  partly  because  of  the  enormous  profits 
earned  by  various  American  companies  through 
Europe's  orders  for  war  munitions — the  financial 
markets  undoubtedly  seemed  at  times  to  regard 
the  prospect  of  a  sudden  end  to  war  as  an  imf avor- 
able  influence  on  values.  In  particular,  the  Ger- 
man chancellor's  voluntary  intimation  to  our 
ambassador  at  Berlin,  of  the  terms  of  peace 
which  would  be  acceptable  to  Germany,  was  re- 
flected immistakably  on  the  stock  exchange, 
where  prices  of  the  "war  munitions  shares"  fell 
5  to  40  per  cent  within  a  very  few  days  on  the  re- 
port of  that  interview. 

But  when  this  political  incident — followed 
though  it  was  by  reiterated  assertions,  on  the 
part  of  German  statesmen,  of  their  wish  to  bring 
about  peace  on  their  own  terms — elicited  only  the 
reply  from  the  enemy  that  the  terms  were  not 
admissible,  even  the  stock  exchange  lost  interest 
in  the  matter.    Reference  to  history  readily  dem- 


I90  WHEN  THE  WAR  ENDS 

onstrated  that  nearly  all  wars  of  the  past  cen- 
tury had  been  ended  only  when  one  completely 
defeated  belHgerent  sued  for  peace.  It  was  recalled 
that  all  the  efforts  of  the  larger  European  Pow- 
ers, to  intervene  or  mediate  in  the  Balkan  War 
of  1 9 13,  accompHshed  no  more  than  a  temporary 
truce  between  the  Balkan  states  and  Turkey; 
that  it  was  only  when  the  Balkan  allies  attacked 
one  another,  and  when  Bulgaria,  rendered  help- 
less by  Rumania's  armed  intervention  on  the  side 
of  Servia,  herself  asked  peace  at  Bucharest,  that 
the  war  was  definitely  terminated.  The  Boer 
War,  like  our  own  Civil  War,  ended  with  the 
complete  defeat  of  one  antagonist,  the  disinte- 
gration of  his  forces,  and  the  people's  acceptance 
of  the  terms  laid  down  by  the  victorious  govern- 
ment. 

In  the  Crimean  War  of  1856,  as  in  the  Russo- 
Turkish  War  of  1878  and  in  our  own  Spanish 
War  of  1898,  the  defeated  belligerent  asked  for 
terms.  It  was  the  provisional  French  Government 
of  187 1  that  applied  for  the  terms  of  peace,  and 
had  to  take  what  Prussia  granted.  Even  in  the 
case  of  our  government's  successful  mediation  of 
1905  between  Japan  and  Russia,  with  the  assent 
of  both  belligerents,  the  financial  markets  knew 
that,  whatever  may  have  been  Japan's  economic 
necessities  (and  the  record  has  by  no  means 
proved  them  to  have  been  urgent),  the  larger  in- 


THE  HOPEFUL  VIEW  191 

fluence  in  promoting  a  settlement  was  the  pres- 
sure applied  to  Russia  by  the  Paris  bankers  who 
were  financing  her  war  expenditure,  and  whose 
growing  imeasiness  over  the  signs,  not  only  of 
economic  difficulties  but  of  coming  political  col- 
lapse in  Russia — which,  as  a  matter  of  fact,  oc- 
curred only  a  few  months  later — ^was  a  paramoimt 
force  in  bringing  the  two  antagonists  together. 
There  was  no  one  to  apply  such  outside  pressure 
to  the  present  belligerents;  they  were  financing 
the  war  themselves. 

But  that  the  war  would  have  to  end  at  no  very 
distant  date,  apparently  remained  a  certainty, 
and  as  to  what  its  ending  would  mean  to  the  finan- 
cial and  economic  world,  a  most  striking  conflict 
of  opinion  continued  to  prevail;  the  conflicting 
judgments  being  framed,  in  fact,  along  two  wholly 
divergent  lines  of  reasoning.  According  to  one 
of  them,  this  war  was  itself  so  immense  a  calam- 
ity, both  political  and  economic,  that  its  ending 
must  introduce  financial  recovery  throughout  the 
world.  To  American  commerce  it  would  reopen 
the  blockaded  ports  of  Europe;  in  behalf  of 
American  finance  it  would  avert  the  conceivable 
forced  sale  in  our  markets  of  the  one  or  two  thou- 
sand millions  of  American  securities  still  owned  in 
Europe.  It  would  remove  at  once  the  overhang- 
ing possibility  of  the  European  confiict  taking  a 
desperately  destructive  turn,   or  of  the  United 


192  WHEN  THE  WAR  ENDS 

States  itself  being  dragged  into  war.  This  being 
so,  a  spontaneous  outburst  of  relief  ought  to 
govern  events  throughout  the  economic  world. 
Neutral  countries  would  emerge  from  a  period  of 
long  suspense,  without  the  prospect  of  that 
aftermath  of  economic  exhaustion  which  bellig- 
erent Europe  must  undergo,  with  abundant  ma- 
terial resources  of  their  own  in  hand,  and  with 
the  certainty  that  Europe  must  depend  on 
their  productive  resources  for  physical  rehabilita- 
tion. 

As  against  this  cheerful  forecast,  it  was  asserted 
by  people  of  the  opposite  opinion  that  trade,  even 
in  neutral  states,  had  been  supported,  since  the 
war  began,  by  the  military  demands  of  belligerent 
Europe.  Not  only  must  those  activities  cease 
instantly  with  the  ending  of  war,  but  the  fictitious 
character  of  the  buying  demand  would  at  once 
become  evident.  European  governments  would 
be  overloaded  with  debt  and  the  European  peo- 
ple crushed  with  taxes.  How,  then,  would  either 
of  them  be  able  to  pay  for  American  exports,  if  a 
large  export  movement  were  to  continue  after 
war?  No  European  state  could  long  postpone 
the  reform  of  its  inflated  paper  currency,  or  the 
removal  of  those  emergency  expedients  in  credit 
whereby  general  insolvency  was  averted  in  the 
preliminary  strain  on  credit  when  the  war  began. 
But  that  is  a  process  of  contraction  which,  as  a 


l/ 


ECONOMIC  READJUSTMENT       193 

good  deal  of  experience  has  taught,  will  aggra- 
vate hard  times. 

Furthermore,  although  prices  of  American 
commodities  had  not  been  inflated  by  depreciated 
currency  in  the  United  States,  every  one  of  our 
products  used  in  war  (such  as  copper,  lead,  zinc, 
and  probably  steel)  had  been  abnormally  enhanced 
in  price  by  the  military  demand — ^sometimes  100 
or  150  per  cent  from  the  prices  of  1914.  Those 
markets  would  have  to  face  violent  readjustment ; 
prices  for  the  same  metals  fell  30  to  50  per  cent 
in  the  first  year  after  Waterloo,  although  their 
use  for  munition  purposes  had  been  far  less  ex- 
tensive then  than  now.  All  home  industries 
using  such  materials  would  have  a  more  or  less 
similar  experience  to  undergo. 

Demand  for  our  wheat  was  imdoubtedly  kept  ^ 
up  by  the  blockade,  during  more  than  two  years, 
of  wheat  exports  from  Russia,  a  country  which 
produces  one-fourth  of  the  whole  world's  wheat 
crop.  But  Odessa  and  Riga  would  be  reopened 
at  once  to  the  wheat-consuming  world.  Not 
least  of  all,  our  manufacturers,  responding  to  the'>( 
imprecedented  demands  of  Europe,  had  invested 
immense  sums  of  capital  in  plants  to  produce 
munitions  of  war.  That  trade  would  practically 
end  with  the  war.  The  companies  and  their 
shares  (whose  prices  were  in  191 5  put  up  200  to 
1,200  per  cent  on  the  stock  exchange)  must  come 


194  WHEN  THE  WAR  ENDS 

back  to  a  normal  basis,  with  great  incidental  dis- 
turbance. These  considerations,  it  was  usually- 
pointed  out,  were  independent  of  the  other  dis- 
puted question,  What  will  be  the  character  of 
Europe's  post-bellum  competition  with  our  man- 
ufacturing industries,  whether  in  the  home  mar- 
ket or  in  the  export  trade  ? 

At  the  end  of  191 5,  the  main  question  thus 
disputed  was  put  categorically  by  a  New  York 
newspaper  to  26  well-known  bankers,  manufac- 
turers, economists,  government  officials,  railway 
managers,  and  capitalists.  Of  the  answers,  14 
were  to  the  effect  that  American  prosperity  would 
continue  after  peace;  10  were  of  the  opposite 
opinion;  2  were  undecided.  This  distribution  of 
opinion  no  doubt  reflected  accurately  enough  the 
judgment  of  the  intelligent  general  public. 

But  all  the  answers  pointed  to  the  inference 
that  a  period  of  great  perplexity  and  unsettlement 
would  inevitably  follow  the  ending  of  the  war, 
and  that  it  must  be  left  for  the  longer  future  to 
determine  what  this  epoch-making  war  will  have 
meant  to  economic  history.  That  history,  in  the 
past,  undoubtedly  teaches  that  the  settlement 
at  the  end  of  some  of  the  world's  great  wars  has 
had  profound  influence  on  the  future  economic 
position  of  the  nations.  Such  influence  was  cer- 
tainly exerted  in  the  sequel  to  the  Seven  Years' 
War,  in  which  England  ousted  France  from  the 


LESSONS  OF  THE  PAST  195 

American  and  Asiatic  continents;  making  her- 
self, by  the  Peace  of  Paris  in  1763,  mistress  of  the 
Mississippi  valley,  of  Canada  and  of  India,  and 
thereby  changing  the  colonial  history  of  the 
world.  Something  of  the  enormous  economic 
prestige  with  which  England  emerged  from  that 
celebrated  conflict  has  at  times  been  thought  to 
attach  to  Prussia  after  the  war  of  1871.  But  in 
that  case,  larger  allowance  is  necessary  than  is 
usually  made  for  the  results  of  the  German  im- 
perial imity  which  followed  the  victory  over 
France,  and  which  performed  for  the  cumbersome 
political  structure  of  the  German  states  a  good 
part  of  what  the  Constitution  of  1787  performed 
for  this  country. 

It  is,  in  fact,  easily  possible  to  be  deceived  in 
drawing  inferences  of  this  character  from  success- 
ful wars.  The  question  is  not  always  settled  by 
geography  and  territorial  boundaries.  Nobody 
seriously  thinks  of  ascribing  our  own  coimtry's 
prosperity,  in  the  half-dozen  years  after  1898,  to 
the  acquisition  of  the  Philippines;  it  would  be 
much  easier  to  prove  that  the  increased  prosper- 
ity of  Spain  during  the  same  period  was  promoted 
by  the  loss  of  them.  The  addition  of  the  im- 
mensely valuable  Transvaal  states  to  her  colonial 
dominions,  as  a  sequel  to  the  Boer  War  of  1899, 
was  followed  in  England  by  a  period  of  imques- 
tionably  waning  economic  power.     Japan  spent 


196  WHEN  THE  WAR  ENDS 

a  series  of  years,  after  her  successftil  war  with 
Russia,  in  a  state  of  financial  depression. 

The  truth  is,  that  it  needs  exceptionally  favor- 
ing circumstances  to  make  a  great  war  anything 
but  a  calamity,  in  its  industrial  sequel,  to  all  the 
combatants.  Politically,  the  rearrangements  in 
the  Peace  of  Westphalia  were  of  high  importance; 
beyond  all  else  they  settled,  very  largely,  the  long 
and  seemingly  hopeless  civil  conflict  on  questions 
of  religion.  Yet  the  Thirty  Years*  War  neverthe- 
less left  the  population  of  Germany  reduced,  ac- 
cording to  some  estimates,  by  upward  of  20  per 
cent,  and  it  was  quite  a  century  before  the  Ger- 
man states  again  cut  any  large  figure  in  Europe. 
If  the  great  prosperity  of  the  Northern  United 
States,  in  the  half-dozen  years  after  the  Civil 
War,  is  reckoned  an  exception,  it  must  never  be 
forgotten  what  part  was  played  by  the  railway 
construction,  the  opening  up  of  the  new  West, 
the  increase  in  the  country's  agricultural  produc- 
tion, the  immense  immigration — a  movement 
which,  in  the  three  last  years  of  the  war  period 
itself,  more  than  equalled  all  the  losses  of  the 
North  in  battle,  and  which  was  larger  still  on  re- 
turn of  peace. 

None  of  these  influences  can  possibly  be  dupli- 
cated in  Europe  after  this  war.  They  did  not 
affect  the  whole  of  our  own  country,  even  at  the 
time.     So  far  had  the  South's  economic  power 


IN  THE  LAST  CENTURY  197 

been  crushed  by  the  four-year  conflict  from  1861 
to  1865,  that  with  all  the  spur  applied  through 
the  pressure  of  hard  times,  and  with  all  the  urgent 
demand  from  home  and  foreign  spinners,  to  re- 
plenish their  almost  exhausted  supplies  of  raw 
material,  it  was  not  until  1878  that  even  the  Amer- 
ican cotton  crop  again  reached  the  size  of  that  of 
1859.  **The  peace  of  Europe  from  the  battle  of 
Waterloo  to  the  Crimean  War,"  Thorold  Rogers 
declares  in  his  "Economic  Interpretation  of  His- 
tory," **was  the  peace  of  languor,"  in  which 
*' European  nations  were  recovering  from  the 
losses  which  they  had  suffered  for  eighteen  years 
of  bloodshed."  It  is  not  the  least  of  the  problems, 
whether  on  the  present  occasion  it  will  again  re- 
quire the  greater  part  of  half  a  century  for  eco- 
nomic Europe  to  get  fully  on  its  feet. 


CHAPTER  XI 
THE  ECONOMIC  AFTERMATH 

IF  the  problem  of  Europe^s  political  recon- 
struction when  the  war  is  over — the  question 
as  to  the  changes  which  may  be  witnessed  in 
the  Rhine  country,  in  the  Ottoman  dominions,  in 
the  Balkan  states,  in  Europe's  colonial  posses- 
sions, in  that  jumble  of  nationalities  known  as 
the  Austrian  Empire — ^has  been  beyond  the  reach 
of  prophecy  during  the  progress  of  the  war,  the 
problem  of  Europe's  economic  reconstruction  has 
been  quite  as  baffling.  It  is  a  problem  which  in- 
volves three  distinct  considerations — the  future 
condition  of  each  belligerent,  taken  individually; 
the  place  which  each  will  hereafter  occupy  in  the 
world's  economic  order,  and  the  economic  relations 
of  each  to  the  others  on  return  of  peace. 

All  past  experience  goes  to  prove  that  the 
process  of  financial  readjustment,  after  the  strain 
of  this  present  war  is  definitely  over,  will  involve 
an  economic  strain  of  extreme  severity,  affect- 
ing every  belligerent.  Not  only  will  the  artificial 
stimulus  of  the  prodigious  government  expendi- 
ture be  withdrawn,  and  very  suddenly,  from  the 

198 


/ 

CONDITIONS  AFTER  WATERLOO     199 

industries  concerned,  but  there  will  then  arise,  in 
such  shape  as  history  has  perhaps  never  before 
presented,  the  problem  of  bringing  back  to  a 
normal  basis  the  currency  and  credit  systems; 
inflated  and  perverted  as  they  have  been  by  the 
remarkable  *' emergency  expedients"  which  every 
government  applied  at  the  very  outbreak  of  the 
war,  and  has  continued  to  apply  in  the  face  of 
progressive  decrease  in  the  stock  of  acctimulated 
capital.  The  notion  that  a  prolonged  and  costly 
war  will  be  followed  ordinarily  by  prosperity  and 
"boom  times,"  is  ptire  illusion.  In  the  first  year)( 
after  Waterloo  the  average  price  of  a  long  list  of 
English  commodities  fell  no  less  than  30  per  cent. 
Land  values  came  down  at  a  rate  which  ruined 
himdreds  of  owners,  speculators,  and  mortgage- 
holders.  A  long  series  of  panicky  movements 
occurred  on  the  stock  exchange  in  the  three  years 
after  peace.  The  half-dozen  years  beginning  with 
Jime,  1 81 5,  were  described  by  a  contemporary 
English  historian  as  a  period  *'of  almost  unex- 
ampled adversity." 

Let  it  be  remembered,  first,  how  stupendous  is 
the  mass  of  current  international  liabilities,  pay- 
ment of  which  was  suspended  on  the  declaration 
of  war.  Had  the  banking-houses,  whose  maturing 
credits  at  other  European  cities  were  thus  suddenly 
made  imavailable,  been  left  to  themselves,  bank- 
ruptcies on  a  portentous  scale  must  inevitably 


2CX)     THE  ECONOMIC  AFTERMATH 

have  followed.  That  result  was  averted  through 
the  use  of  banking  credit,  under  government 
guarantee,  to  an  extent  never  previously  known 
in  banking  history.  But  these  emergency  credits 
and  government  guarantees  were  arranged  to 
end  with  the  period  of  war.  Except  where  liqui- 
dation of  other  assets  has  enabled  the  firms  in 
question  to  anticipate  that  settlement,  return  of 
peace  must  bring  the  hour  of  reckoning.  For  the 
assisted  houses  must  repay  the  bank  or  the  gov- 
ernment, and  must  look  to  recoup  themselves 
from  their  foreign  correspondents,  who  will  them- 
selves, at  that  very  time,  have  their  own  hands 
full  at  home. 

Nor  is  the  case  very  different  with  the  immensely 
expanded  paper  currencies.  Note  circulation  of 
the  Banks  of  France,  Germany,  Russia,  and  Italy 
was  expanded  $3,500,000,000  in  the  first  full  year 
of  hostilities;  an  increase  of  no  less  than  121  per 
cent,  and  this  not  including  new  paper  currency 
other  than  bank-note  issues.  In  the  same  four 
states,  it  increased  $2,600,000,000  more  in  the 
second  year  of  fighting.  If  these  are  to  be  re- 
stored to  normal  proportions  when  the  war  is  over 
— ^if  Germany  and  France  especially  are  to  return 
to  a  basis  of  gold  redemption  for  their  bank-notes 
on  demand — an  extremely  trying  period  will  con- 
front the  whole  of  Europe.  What  the  precise  at- 
tendant phenomena  will  be,  it  is  not  at  all  easy 


BELLIGERENT  EUROPE  20i 

to  predict.  The  reasonable  certainty  is,  that  the 
process  of  readjustment  will  be  long  drawn  out, 
and  that  '* emergency  expedients"  which  were  to 
end  with  the  ending  of  the  war  will  be  repeatedly 
extended.  It  was  six  years  after  the  battle  of 
Waterloo  before  the  Bank  of  England  fully  re- 
sumed gold  as  payments.  One  of  Lloyd-George's 
predictions  to  Parliament,  when  chancellor  of  the 
exchequer  in  1914,  was  that  the  really  acute  stage 
of  Europe's  economic  strain  is  most  likely  to  oc- 
cur four  or  five  years  after  the  war  is  over. 

Which  of  the  nations  will  suffer  most  in  this 
economic  reckoning?  How  will  the  economic 
status,  relative  and  actual,  of  the  principal  bellig- 
erents be  affected  by  the  war  ?  When  Europe  at 
last  emerges  from  the  tornado  of  bloodshed  and 
destruction,  shall  we  have  before  us  the  same 
economic  world  as  we  had  in  July,  1914,  its  con- 
stituent nationalities  occupying  the  same  respec- 
tive positions  as  before,  and  developing  their  re- 
spective energies  on  the  same  lines  as  before;  or 
shall  we  presently  discover  that  economic  positions 
and  relationships  of  the  world  have  been  changed 
ftmdamentally,  and  that  a  different  economic  era 
has  begtm  ?  These  are  questions  of  curious, 
though  as  yet  little  more  than  speculative,  in- 
terest. 

How  the  various  nations  were  ranged  in  the 
economic  order,  when  this  war  broke  out,  every 


202     THE  ECONOMIC  AFTERMATH 

one  knows.  England  was  still  indisputably  the 
world's  financial  and  commercial  centre.  Ger- 
many had  become  an  aggressive  competitor, 
however,  in  the  field  of  home  production  and 
foreign  trade — so  successful  a  competitor,  indeed, 
as  to  reduce  to  outright  effrontery  Berlin's  habit- 
ual allegation  that  this  war  was  necessary  to  '*get 
a  place  in  the  sun"  and  "obtain  the  freedom  of 
the  seas."  France,  imtil  the  shadow  of  impending 
war  paralyzed  financial  confidence,  had  gained 
through  her  people's  thrift  and  her  bankers'  con- 
servatism a  prestige  in  the  world*s  economic  sys- 
tem probably  higher  than  at  any  time  in  the  pre- 
ceding century.  Paris  had  in  fact  financed  even 
the  London  money  market  during  the  acute  strain 
of  the  Boer  War  period;  had  provided  Russia 
with  the  financial  sinews  of  war  for  the  Man- 
churian  campaigns;  had  helped  out  New  York 
(through  very  large  purchases  of  our  new  seciu:- 
ities)  in  a  troublesome  situation  as  recently  as 
1 910,  and  had  actually  been  lending  enormous 
sums  to  Germany's  financiers  and  merchants, 
when  the  menacing  attitude  of  the  German  Gov- 
ernment, at  Morocco  in  191 1,  forced  as  an  or- 
dinary precaution  recall  of  practically  all  such 
credits. 

The  United  States  was  more  of  an  economic 
puzzle.  Its  economic  prestige  in  the  world  at 
large,  immediately  after  1898,  was  undoubtedly 


NEW  YORK  VERSUS  LONDON     203 

enormous.  Having  purchased  $200,000,000  of 
England's  Boer  War  loans  direct  from  the  British 
exchequer  after  1899 — a  then  imprecedented  oc- 
currence— and  having  reached,  two  years  later,  a 
pinnacle  of  financial  power  which  seemed  unprece- 
dented, our  markets  listened  in  1901  to  the  Wall 
Street  prediction  that  New  York  was  about  to 
dispute  the  world's  financial  primacy  with  Lon- 
don. 

How  premature,  if  not  permanently  illusory, 
were  such  expectations,  we  learned  foiu*  or  five 
years  later,  when,  to  sustain  the  structure  of 
American  speculation,  our  market's  outright  bor- 
rowing from  Europe  rose  to  the  himdreds  of  mil- 
lions ;  when  our  financial  community  was  stretched 
flat  on  its  back  in  the  panic  of  1907,  and  when  we 
seemed,  during  the  three  ensuing  years,  to  be 
chiefly  occupied  in  enlisting  European  capital  to 
help  float  new  railway  securities  which  our  home 
investors  did  not  show  willingness  or  ability  to 
absorb.  But  in  what  position,  actual  or  relative, 
shall  we  and  the  other  great  states  emerge  from 
the  epoch-making  changes  of  this  war?  Of  the 
three  belligerents  hitherto  foremost  in  financial 
prestige,  it  is  imdoubtedly  the  prevalent  impres- 
sion that  France  has  given  the  greatest  indication 
of  weakened  economic  power.  For  more  than  a 
year,  her  government  did  not  venttire  to  provide 
for  war  expenses  through  important  single  nego- 


204     THE  ECONOMIC  AFTERMATH 

tiations  of  long-term  loans.  A  short-term  loan, 
offered  in  New  York  on  highly  favorable  terms  to 
the  investor,  fell  far  short  of  success. 

A  large  proportion  of  the  war  expenditure  was 
met,  as  we  have  seen,  through  borrowings  by  the 
government  from  the  Bank  of  France.  These 
signs  of  economic  weakness  are  the  more  impres- 
sive in  view  of  the  economic  position  of  France 
during  the  past  three  decades.  The  change  to 
her  war-time  situation  is  usually  ascribed  to  the 
circimistances  under  which  the  war  began — the 
invasion  of  France;  the  practical  certainty  that, 
but  for  Belgium  and  England,  Paris  v/ould  have 
fallen;  the  fact  that  one  of  the  richest  French 
industrial  districts  had  been  occupied  by  the  Ger- 
mans since  the. first  month  of  hostilities,  and  the 
well-known  intimation  of  influential  German 
statesmen,  on  ntimerous  occasions  since  1871,  that 
the  purpose  of  Germany,  in  another  war,  would  be 
to  insure  the  economic  ruin  of  France.  It  is 
true  that  signs  of  impairment  in  French  eco- 
nomic prestige  had  been  pretty  plainly  visible, 
even  before  the  fateful  last  week  of  July,  19 14. 
At  a  time,  that  year,  when  even  the  London 
Stock  Exchange  was  dismissing  as  an  absurdity 
the  suggestion  of  a  coming  European  war,  the  dis- 
turbance which  had  begun  in  European  finance 
was  commonly  ascribed  to  the  unfavorable  con- 
dition of  the  Paris  market,  the  hoarding  of  gold 


FUTURE  OF  FRANCE  205 

by  the  French  people,  and  the  virtual  failure  of  a 
French  public  loan.  But  there  is  very  good  reason 
to  ascribe  even  this  to  the  growing  timidity  of 
capital,  which,  with  the  mysterious  prescience  of 
the  money  market,  may  instinctively  have  sus- 
pected after  the  ominous  clash  with  Germany  in 
191 1  that  actual  attack  on  France  could  not  be 
long  delayed. 

Be  this  as  it  may,  we  have  yet  to  ask  how 
France  will  emerge  from  the  terrific  economic 
strain  of  the  present  war.  On  that  question  we 
have  some  historical  precedent  to  guide  us. 
France,  three  times  in  the  two  past  centuries,  has 
been  completely  defeated  and  left  in  a  state  of 
seeming  economic  exhaustion — at  the  end  of  the 
long  campaign  of  Louis  XIV,  at  the  final  over- 
throw of  Napoleon,  and  at  the  crushing  climax  of 
the  Franco-Prussian  conflict.  In  the  first,  her 
commercial  predominance  appeared  to  have  had 
its  coup  de  grace;  in  the  second,  her  European 
empire  disintegrated;  in  the  third,  a  very  impor- 
tant part  of  her  own  territory  and  an  enormous 
ransom  were  exacted.  Yet,  after  each  of  these 
experiences,  the  world  witnessed  the  extraordinary 
spectacle  of  France  promptly  resuming  her  place 
in  the  economic  system,  and  in  the  end  display- 
ing a  tangible  economic  power  even  greater  than 
before.  It  is  impossible  that  this  should  have 
occurred  without  the  possession  of  national  quali- 


2o6  THE  ECONOMIC  AFTERMATH 

ties  and  individual  resources  of  which  her  enemies 
had  failed  to  take  account.  Perhaps  the  peculiar 
character  of  the  French  people — their  thrift,  their 
imagination,  their  aptitude  as  arbiter  of  good  form 
and  good  taste  among  the  nations — explains  this 
remarkable  result.  If  so,  it  is  difficult  to  imagine 
the  France  of  the  longer  economic  future  occupy- 
ing in  the  economic  system  any  different  position 
than  she  has  occupied  in  the  past. 

What,  then,  should  the  enormous  strain  of  the 
present  conflict  forebode  to  Germany  ?  It  is  cer- 
tainly not  true,  as  writers  and  correspondents 
have  occasionally  insisted,  that  Germany  is  al- 
ready "bankrupt."  Yet  the  war  has  brought  to 
financial  and  industrial  Germany  an  experience 
to  which  no  other  powerful  belligerent  has  been 
subjected.  Germany's  economic  prestige  of  the 
three  past  decades  has  originated,  first  in  her 
power  to  produce  commodities  at  low  cost  and  of 
desirable  quality,  next  in  her  capture  of  the  ocean 
trade  through  which  these  goods  were  brought  to 
foreign  markets.  During  more  than  two  years  the 
outlet  for  this  production  has  been  blocked;  her 
commercial  fleet  has  ceased  to  navigate  the  seas; 
the  main  source  of  Germany's  recent  economic 
prestige  has  literally  dried  up.  "What  we  now 
manufacture,"  one  of  the  foremost  German  news- 
papers declared  in  the  early  months  of  191 5,  "is; 
no  longer  the  productive  goods  which  meant  new 


GERMANY'S  OUTLOOK  207 

value  and  increasing  national  wealth.  Now  we 
produce  only  war  material;  the  work  of  our  hands 
vanishes  in  air  as  powder  and  lead.  We  are  using 
up  our  resources  and  capital." 

This  has  happened  in  a  community  whose  ac- 
cumulation of  capital  as  a  nation  has  been  an 
incident  of  our  own  times.  Even  in  the  half 
dozen  years  before  the  war  began,  Germany  was 
a  borrower  of  foreign  capital,  on  an  extensive 
scale,  to  conduct  her  domestic  industries.  The 
process  did  not  mean  poverty;  it  might  mean,  and 
in  Germany's  case  undoubtedly .  did  mean,  so 
rapid  an  increase  in  opportimities  for  profitable 
industrial  expansion  that  foreign  as  well  as  do- 
mestic capital  could  be  profitably  used.  But 
the  war  which  has  stopped  abruptly  this  commer- 
cial activity  and  the  resultant  acctimulation  of 
new  capital,  is  also  depleting  with  immense  rapid- 
ity the  accumulations  of  the  past.  If  we  allow 
for  the  financial  assistance  granted  by  England  to 
her  continental  allies,  it  cannot  be  doubted  that 
the  average  daily  war  expenditure  of  Germany 
from  her  own  resources  has  far  exceeded  that  of 
any  other  government  in  the  present  conflict. 
The  process  of  depletion,  under  these  two  sets  of 
circimistances,  must  have  been  very  rapid,  even 
when  disguised  by  the  bold  credit  expedients  of 
the  government.  Such  an  experience  should  lead 
to  a  period  of  very  severe  economic  depression. 


2o8     THE  ECONOMIC  AFTERMATH 

Meantime,  also,  the  phenomenon  of  currency  de- 
preciation has  appeared  in  Germany  as  in  no 
other  powerful  continental  state  aside  from  Russia. 
Her  government  has  been  driven,  first  to  formal 
suspension  of  specie  redemption  of  its  currency, 
then  to  the  recourse  of  prohibiting,  under  penalty 
of  fine  and  imprisonment,  the  bidding  of  a  pre- 
mium on  gold  or  the  offering  of  the  currency  at 
a  discount. 

Revolutionary  France  of  1789  resorted  to  the 
same  expedients,  yet  rose  to  predominant  political 
and  financial  power  a  few  years  later.  But  the 
conditions  are  not  analogous;  for  the  French 
economic  revival,  in  the  earlier  years  of  the 
Napoleonic  regime,  was  a  sign  of  the  orderly 
utilization  of  national  resources  which  had  never 
previously  been  touched,  whereas  Germany  had 
so  far  exerted  all  the  powers  of  scientific  taxation, 
before  her  resources  were  subjected  to  the  present 
strain,  that  the  increase  in  the  army  during  19 13 
(undoubtedly  in  preparation  for  this  war)  was 
accomplished  only  by  imposing  an  extraordinary 
burden,  described  as  the  *' property  levy"  or 
** contribution  by  property  owners,'*  on  all  the 
individual  wealth  of  the  Empire.  A  further  dif- 
ficulty in  forecasting  Germany's  power  quickly  to 
resume  her  old  position  in  the  race  for  economic 
leadership  lies  partly  in  the  as  yet  not  clearly 
determined    question,    how    far    the    country's 


NATIONAL  QUALITIES  209 

notable  commercial  expansion,  since  the  Franco- 
Prussian  War,  was  due  to  peculiar  national  qual- 
ities of  industry,  inventiveness,  and  energy,  which 
other  nations  could  not  match,  and  how  far  to 
government  favor  or  other  artificial  stimulus. 
The  financial  and  industrial  prestige  of  England 
has  its  roots  in  the  habits  and  qualities  of  the 
people,  as  far  back  as  Queen  Elizabeth's  reign. 
France  displayed  in  the  time  of  Louis  XIV  the 
commercial  traits  which  insure  her  present 
position  in  the  economic  world.  The  natural  re- 
sources and  individual  qualities  which  have 
achieved  America's  present  position  among  the 
nations  can  be  traced  back  at  least  a  century  in 
our  history. 

But  Germany  is  a  newcomer;  one  may  almost 
describe  her  as  a  made- to-order  industrial  state. 
Half  a  century  ago,  few  people  would  have 
classed  the  German  nation  as  a  leading  factor 
in  the  world  of  economic  power  and  prestige. 
Hamburg,  Frankfort,  and  Bremen,  it  is  true,  had 
even  then  a  financial  history  almost  as  old,  and 
fully  as  respectable,  as  that  of  Venice  or  London; 
but  the  entry  of  Germany  as  a  whole  into  the  field 
of  world  finance  hardly  antedates  1871.  Her  re- 
markable economic  expansion,  since  that  date, 
has  taken  chiefly  the  two  forms  of  scientific  pro- 
duction and  of  aggressive  commercial  develop- 
ment under  government  auspices.    The  intrusion 


2IO  THE  ECONOMIC  AFTERMATH 

of  German  industry  into  the  competitive  field  of 
the  outside  world,  during  the  three  or  four 
past  decades,  foreshadowed  in  an  extremely  in- 
teresting way  her  methods  of  aggressive  warfare. 
It  is  entirely  probable  that  the  "German  effi- 
ciency" which  has  become  proverbial  in  the  his- 
tory of  the  war,  may  find  equally  vigorous  ex- 
pression in  the  period  of  industrial  recuperation 
which  must  come  after  the  war.  Yet  the  lack  of 
accumulated  capital  resources  at  home,  the  loss 
of  productive  laborers  in  battle,  the  enormous 
burden  of  war-time  indebtedness  and  the  new 
taxation  which  must  come  after  war  is  over,  will 
be  a  peculiarly  formidable  handicap.  Germany 
will  have  to  meet,  in  a  vastly  greater  degree  than 
France,  the  problem  of  direct  industrial  and  com- 
mercial competition  with  coimtries  which  will 
then  be  far  more  abimdantly  equipped  with  cap- 
ital for  the  purpose. 

One  of  those  competitors,  after  as  before  the 
war,  will  naturally  be  England.  The  problem  of 
the  economic  aftermath  in  England  gains  par- 
ticular interest  from  what  has  happened  since  the 
war  began.  It  has  hardly  yet  been  possible  for 
the  world  to  realize  the  stupendous  loss  in  eco- 
nomic prestige  which  London  has  already  suffered. 
In  continental  Europe,  the  things  which  have 
happened  to  its  financial  and  commercial  machin- 
ery since  July,  1914 — the  moratorium,  the  closing 


ENGLAND'S  PROBLEM  211 

of  the  exchanges,  the  suspension  of  gold  pay- 
ments, the  recourse  to  paper  currency — ^had  hap- 
pened before  in  those  communities.  But  to  Eng- 
land the  proclamation  of  a  moratorium  on  debts 
in  August,  1 91 4,  the  closing  of  the  stock  exchange, 
and  the  issue  of  special  government  paper  money, 
were  new  and  startling  occurrences,  not  only  in 
our  generation,  but  in  English  financial  history 
since  the  modem  credit  system  was  established. 

Not  even  during  the  eighteen  years  of  the  ex- 
hausting Napoleonic  War,  did  financial  London 
resort  to  any  of  these  expedients.  It  is  true,  as 
I  have  already  recalled,  that  a  great  depreciation 
of  sterling  exchange  occurred  in  the  Napoleonic 
period  on  such  foreign  markets  as  Amsterdam 
and  Hamburg,  and  an  actual  premitmi  on  gold  at 
home  occurred  in  the  Napoleonic  wars.  But 
London  had  then  no  rival  to  dispute  its  finan- 
cial primacy;  and  even  so,  it  was  six  years  after 
the  final  fall  of  Napoleon  before  the  Bank  of  Eng- 
land was  able  to  resimie  gold  payments.  Still 
more  significant  has  been  the  voluntary  abdica- 
tion by  London,  for  the  period  of  war,  of  its  place 
as  the  world's  financial  centre. 

In  the  case  of  no  other  belligerent,  therefore, 
does  the  problem  of  economic  after-effects  of  this 
present  war  present  more  dramatic  historical 
possibilities.  The  world  began  to  ask  in  191 5  if 
the  sceptre  of  financial  leadership  might  not  turn 


212     THE  ECONOMIC  AFTERMATH 

out  to  have  passed  permanently  from  the  hands 
of  London;  and  the  astonishing  depreciation  of 
exchange  rates  on  that  market  encouraged  the 
idea.  Lombard  Street  itself,  depressed  and  be- 
wildered as  it  was  at  the  all  but  unimaginable 
succession  of  events  already  on  the  record,  be- 
lieved nothing  of  the  sort.  It  was  entirely  con- 
fident that  both  the  commercial  and  the  financial 
prestige  of  Great  Britain  will  be  resumed  when 
the  war  is  over;  that  London  will  again  be  the  un- 
disputed money  centre  of  the  world.  This  con- 
fident expectation  had  its  basis  in  three  facts. 
Nothing  had  occurred  to  drive  English  commerce 
from  the  seas.  However  much  England's  ac- 
cumulated stock  of  capital  may  be  reduced  by  the 
prodigious  waste  of  war,  the  proportionate  reduc- 
tion, in  the  case  of  her  European  competitors  in 
finance  and  trade,  will  have  been  vastly  greater. 
The  United  States,  with  development  of  its  own 
resources  certain  to  absorb  the  greater  part  of  its 
own  accruing  capital,  cannot  for  years  to  come 
be  fitted  economically  for  the  world's  central 
money  market. 

There  is  force  in  all  three  arguments;  they  are 
reasonably  convincing  as  to  the  general  question 
of  the  ** money  centre."  On  the  other  hand,  only 
the  test  of  the  aftermath  of  war  can  show  just 
what  are  to  be  the  logical  results  of  that  loss  in 
economic   prestige   which   the   English   financial 


WORLD'S  MONEY  CENTRE        213 

market  has  had  to  sustain.  It  is  yet  to  be  deter- 
mined how  much  of  London's  past  financial  power 
was  due  to  the  supposed  invulnerability  of  the 
English  financial  system  to  any  kind  of  shock. 
Resale  to  American  markets  of  more  than 
$1,500,000,000  worth  of  the  American  securities 
held  by  English  investors — ^perhaps  one-third  of 
all  that  was  owned  when  war  began — marked  the 
visible  surrender  of  one  highly  important  factor 
in  the  coimtry's  prestige  as  the  financial  and  eco- 
nomic centre  of  the  world.  It  is  at  least  a  safe 
prediction  that  when  the  war  is  ended  England 
cannot  regain  overnight,  so  to  speak,  the  position 
which  she  lost  as  a  consequence  of  the  economic 
vicissitudes  of  19 14.  It  is  an  easy  possibility  that 
New  York  will  retain  many  of  its  war-time  func- 
tions and  responsibilities  as  the  central  money 
market  for  the  Western  hemisphere. 

Beyond  that  possibility,  the  predictions  of  peo- 
ple familiar  with  the  world's  economic  machinery 
and  economic  history  are  extremely  guarded. 
Undoubtedly,  England's  primacy  has  been  an  out- 
growth of  her  financial  system's  long  imchallenged 
soundness — ^which  is  now,  perhaps,  in  a  way  im- 
paired. But  it  is  also  an  outgrowth  of  her  position 
as  the  workshop  for  other  nations;  of  the  fact 
that  both  her  productive  facilities  and  her  ac- 
cimiulated  capital  have  for  centuries  exceeded 
home  requirements;    of  her  free  trade  with  all 


214  THE  ECONOMIC  AFTERMATH 

the  outside  world,  and  of  the  world-wide  pre- 
dominance of  her  merchant  fleet. 

Granting  that  on  this  occasion  the  American 
financial  system  will  emerge  from  the  war-time 
period  with  a  prestige  superior  to  that  of  England 
— as  attested  by  the  depreciation  on  the  exchange 
market,  in  terms  of  American  money,  of  the  cur- 
rencies of  all  the  greatest  states  of  Europe,  includ- 
ing England — this  country  would  still  hardly 
duplicate  England's  position  as  regards  the  other 
attributes.  We  shall  not  be,  as  England  of  neces- 
sity is,  primarily  the  workshop  of  the  outside 
world.  A  vast  field  of  home  development  still 
awaits  our  manufacturing  output  and  our  capital. 
We  have  not  dared,  and  probably  shall  not  dare 
for  many  years  to  come,  to  try  the  experiment  of 
free  trade.  Our  legislators  have  shown  no  dis- 
position to  free  the  American  merchant  marine 
from  the  fetters  which  have  held  it  back  from  free 
competitive  expansion. 

The  question  of  future  financial  relationships 
between  the  European  Powers  which  went  to 
war  in  1914,  brings  up  other  considerations.  Pre- 
dictions were  publicly  made  by  European  states- 
men, almost  from  the  beginning  of  the  war,  that 
those  relationships  would  be  settled  on  the  basis 
of  political  rancor  and  resentment.  **0n  the 
columns  of  the  British  Empire,"  the  German 
finance  minister  declared  to  the  Reichstag,  De- 


FINANCIAL  ENMITIES  215 

cember  15,  191 5,  at  the  end  of  an  impassioned 
denimciation  of  England,  ''are  written  in  glowing 
letters  the  same  words  as  were  written  on  the  wall 
of  Belshazzar's  palace."  This  declaration,  some- 
what rhetorical  for  a  sober  and  practical  bank 
director,  meant  on  its  face  that  Germany  expected 
to  break  down  Great  Britain's  colonial  system, 
after  if  not  during  the  war.  '  *  So  far  as  commerce 
is  concerned,"  the  president  of  the  British  Board 
of  Trade  retorted,  in  an  equally  bitter  speech  to 
Parliament  a  week  later,  "Germany  is  a  beaten 
nation,  and  it  is  for  us  to  see  that  she  does  not 
recover." 

There  seemed  to  be  little  grotmd  for  taking 
seriously  either  of  these  emotional  assertions. 
So  far  from  the  British  Empire  showing  signs  of 
political  or  economic  disruption,  the  history  of 
the  war  has  indicated  on  the  one  hand,  that  Eng- 
land's colonial  possessions  had  been  drawn  in  im- 
precedented  loyalty  to  the  mother  country,  and 
on  the  other  hand,  that  England's  protection  of 
the  ocean  trade  of  her  colonies  has  never  in  his- 
tory been  so  powerftdly  asserted  as  in  this  great 
war.  That  trade  with  Germany  may  to  a  certain 
extent  be  discoimtenanced  in  the  immediate 
aftermath  of  the  conflict,  by  the  people  now  at 
war  with  her,  is  not  impossible.  There  may  be 
exclusive  and  preferential  tariff  alliances,  and,  in 
any  case,  Germany  will  have  a  long  account  to 


2i6     THE  ECONOMIC  AFTERMATH 

settle  for  her  part  in  provoking  this  war  and  her 
manner  of  conducting  it.  Belgium,  the  Lusitania, 
the  "air  raids,"  the  conspiracy  against  neutral 
munitions  factories — are  episodes  which  will  at 
least  not  help  the  vogue  of  goods  with  the  label 
**Made  in  Germany." 

Still,  the  advantages  of  trade  between  nations 
are  reciprocal.  England,  for  instance,  exported 
in  the  last  full  year  of  peace  $300,000,000  of  mer- 
chandise to  Germany,  of  which  $203,000,000  was 
British  produce,  and  the  shrinkage  in  Great 
Britain's  outward  trade,  during  the  period  of 
war,  resulted  to  a  not  at  all  inconsiderable  extent 
from  the  embargo  on  trade  with  Germany.  A 
correspondent  of  the  London  Economist,  writing 
in  a  reminiscent  vein,  lately  recalled  that  when 
the  Franco-Prussian  War  was  visibly  near  its  end 
in  1 87 1,  ** French  and  German  commercial  trav- 
ellers were  waiting  on  the  frontiers  for  the  mo- 
ment when  peace  should  be  signed,  and  there  was 
a  great  inrush  for  orders,  into  both  France  and 
Germany,  as  soon  as  peace  was  declared."  The 
world's  past  experience,  at  all  events,  points  to 
the  conclusion  that  future  financial  and  business 
relations  of  the  great  countries  of  the  world  will 
not  be  permanently  determined  by  the  hatreds 
and  revengefulness  arising  from  the  war. 

Such  doubt  as  has  actually  arisen,  during  and 
since  the  above-cited  declarations  of  191 5,  based 


TWO  OPPOSITE  CONCLUSIONS    217 

itself  on  the  question  whether  the  analogies  of 
former  wars— the  subsequent  political  and  eco- 
nomic rapprochement  of  the  antagonists  of  the 
Napoleonic  wars,  of  our  own  Civil  War,  and,  to  a 
large  extent,  even  of  the  Franco-Prussian  War — 
could  safely  be  assumed  in  the  present  conflict. 
The  theory  of  statesmen  and  writers  who  answer 
in  the  negative  has  been  that  the  breach  has  been 
too  wide,  the  just  indignation  over  the  wicked 
provocation  of  this  war  too  intense,  the  resent- 
ment at  Germany's  violation  of  rules  of  war  and 
dictates  of  himianity  too  profound,  to  make  even 
economic  reconciliation  possible.  This  feeling 
was  no  doubt  rendered  more  intense  because  of 
the  prevalent  belief  that  on  this  occasion,  in  a 
degree  perhaps  imprecedented  in  the  history  of 
war,  the  problem  of  financial  and  economic  re- 
construction must  underlie  that  of  political  read- 
justment. Nothing  could  better  illustrate  the 
formidable  part  which  it  may  be  destined  to  play 
than  the  fact  that  while  the  lips  of  statesmen 
were  sealed  regarding  the  political  and  territorial 
aftermath  of  war,  the  Allied  Powers  came  voltm- 
tarily  into  the  open  with  a  plain  and  definite  dec- 
laration of  the  most  extraordinary  sort,  regarding 
their  purposes  as  to  economic  relations  with  the 
present  enemy  on  retiun  of  peace. 

This  declaration  was  made  public  as  a  result 
of  the  so-called  ''Economic  Conference"  of  June 


2i8     THE  ECONOMIC  AFTERMATH 

17,  191 6,  at  Paris,  to  which  delegates  were  sent 
by  all  of  the  Allied  governments.  It  set  forth,  in 
considerable  detail,  the  general  programme  which 
the  delegates  recommended  to  their  several  gov- 
ernments in  regard  to  economic  relations  with 
the  enemy,  first  during  the  actual  period  of  war, 
next  during  the  period  of  post-bellimi  reconstruc- 
tion, and  finally  during  the  permanent  period  of 
peace.  The  first  pledge  of  the  Allied  delegates 
was  rightful  and  magnanimous.  Needs  of  those 
countries  which  have  been  * 'victims  of  destruc- 
tion, spoliation,  and  abusive  requisition"  should 
be  recognized  at  the  start,  with  the  view  of  re- 
storing "to  such  countries  as  a  special  privilege" 
their  ruined  or  sequestered  ''raw  material,  in- 
dustrial and  agricultural  machinery,  live  stock, 
and  merchant  marine." 

This  promise  to  imhappy  Belgium,  Servia,  and 
Poland  was  in  line  with  the  highest  motives  that 
prevailed,  first  in  Russia's  challenge  to  Austria's 
reckless  behavior  regarding  Servia,  and  again  in 
England's  entry  into  war  when  Germany  invaded 
and  plundered  Belgiimi.  It  was  not  the  less 
honorable  to  its  authors  in  that  it  had  no  word  to 
say  of  an  indemnity  to  be  paid  by  Germany  to 
Belgium — a  penalty  merited  on  the  face  of  things, 
as  no  other  similar  penalty  in  history  has  been 
merited,  by  the  brutal  cynicism  with  which  the 
German  Government  trampled  on  treaties  of  neu- 


AT  THE  PARIS  CONFERENCE     219 

trality,  violated  international  pledges  regarding 
conduct  of  modem  war,  and  extorted  blood-money 
tribute  in  the  millions  from  non-resisting  Belgian 
towns,  at  the  very  moment  when  only  the  gen- 
erosity of  neutrals  was  preserving  the  Belgian 
people  from  starvation. 

But  this  was  not  the  really  noteworthy  part  of 
the  Allies*  economic  programme.  In  general,  the 
proposals  (tentative  in  so  far  as  they  had  to  await 
approval  of  home  administrations  and  legisla- 
tures) seemed  to  be  directed  toward  the  blocking 
of  any  effort  by  the  Teutonic  Powers  after  war  to 
gain  possession,  for  their  own  production  and  ex- 
port trade,  of  the  markets  of  their  present  enemies. 
The  declaration  left  it  more  or  less  a  matter  of 
conjecture  how  far  the  programme  was  offensive 
and  how  far  defensive.  Measures  were  to  be 
taken  which  would  ''assure  the  independence  of 
the  Allies"  in  matters  touching  "financial,  com- 
mercial, and  maritime  organization."  The  con- 
tracting governments  were  "resolved  to  take 
without  delay  the  necessary  measures  to  rid  them- 
selves of  dependence  on  enemy  countries  as  re- 
gards raw  material  and  manufactured  articles 
which  are  essential  to  the  normal  development  of 
their  economic  activity."  This  would  apparently 
indicate  merely  a  form  of  protection  to  home  in- 
dustries— at  least  so  far  as  concerned  exclusion  of, 
or  discrimination  against,  importations  from  Ger- 


220     THE  ECONOMIC  AFTERMATH 

many  or  Austria.  A  considerably  longer  step  was 
suggested  by  the  statement  that,  in  the  period  of 
economic  reconstruction,  and  in  order  to  protect 
their  commerce  and  industries  *' against  an  eco- 
nomic depression  resulting  from  *  dumping*  or 
against  any  other  unfair  method  of  competition,'* 
a  period  should  be  fixed  by  the  Allies  ''during 
which  the  commerce  of  the  enemy  Powers  shall  be 
subjected  either  to  prohibition  or  to  a  special 
system  which  shall  be  efficacious.'* 

Even  this  proposal  was  restricted  to  the  period 
of  transition  from  abnormal  war  conditions  to 
the  normal  state  of  peace;  but  the  next  looked  to 
the  longer  future.  Among  what  were  designated 
as  **  permanent  measures  of  mutual  aid  and  col- 
laboration** it  was  stated  that  the  present  Allied 
governments  "may  have  recourse  to  subsidized 
enterprises  under  the  direction  or  control  of  the 
governments,**  or  to  "payment  to  encourage 
scientific  and  technical  researches,"  or  even  to 
"permanent  prohibitions.**  Finally,  as  to  future 
relations  of  the  Allied  Powers  with  one  another, 
the  conference  declared  itself  united  "in  pre- 
serving for  the  AlHed  coimtries,  in  preference  to 
all  others,  their  natural  resources  during  the  period 
of  commercial,  industrial,  agricultural,  and  mari- 
time reconstruction,"  and  agreed  for  that  purpose 
"to  establish  special  arrangements  which  will 
facilitate  an  exchange  of  resources." 


MOTIVES  OF  THE  ALLIES        221 

No  series  of  proposals  quite  like  this  had  ever 
before  been  formulated,  either  during  war  or  in 
sequence  to  it.  The  declaration  at  once  called 
forth  comment  as  widely  divergent  in  interpre- 
tation as  in  criticism.  By  some  European  critics, 
it  was  assumed  that  the  programme  was  urged 
primarily  by  the  continental  Allies — Russia  and 
Italy  in  particular — ^who  wished  to  be  guaranteed 
against  falling  again  under  Germany's  financial 
and  commercial  domination.  But  there  were 
also  intimations  that  the  programme  only  formu- 
lated the  British  ministerial  assertion  of  the  year 
before  that  **so  far  as  commerce  is  concerned, 
Germany  is  a  beaten  nation,  and  it  is  for  us  to 
see  that  she  does  not  recover."  Against  this 
second  theory,  the  Paris  proposals  were  defended 
as  the  erecting  of  a  necessary  safeguard  against 
the  commercial  chaos  pictiured  as  a  result  of  Ger- 
many's desperate  economic  situation  after  war. 
From  yet  another  point  of  view,  it  was  alleged 
that  England's  proposed  participation  in  this 
sweeping  protective  policy  embodied  a  clever 
move  by  Bonar  Law  and  his  English  "Tariff  Re- 
formers" to  fasten  on  England,  in  the  stress  of 
war,  a  tariff  system  which  English  voters  had 
steadfastly  rejected  in  time  of  peace.  Even  at 
Washington,  the  Paris  declaration  elicited  the 
pointed  inquiry  whether  or  not  the  pledge  of  the 
Allies,  to  preserve  by  mutual  arrangement  the 


222     THE  ECONOMIC  AFTERMATH 

resources  of  their  countries  "in  preference  to  all 
others,"  pointed  to  discrimination  against  the 
United  States. 

On  the  whole,  the  impression  made  in  neutral 
communities  was  that  the  whole  procedure  reflected 
not  reasoned  conviction  based  on  experience,  but 
the  vague  apprehension — arising  from  uncertainty 
as  to  what  will  actually  be  the  world's  economic 
or  political  situation  when  war  is  over — ^which 
lias  colored  even  our  people's  judgment  as  to  their 
own  country's  situation  on  return  of  peace.  When 
experienced  statesmen  and  thinkers  were  refusing 
to  risk  prediction  of  the  economic  sequel  to  this 
war,  no  one  need  have  wondered  at  panicky  de- 
mands to  prepare  for  anything.  The  compact  to 
resist  the  imagined  inroads  of  commercial  Ger- 
many, after  return  of  peace  in  Europe,  is  at  least 
as  logical  as  the  demand  for  an  American  army 
large  enough  to  resist  her  imagined  military  in- 
roads. The  two  suppositions  are  indeed  not  at  all 
dissimilar;  for  whereas  the  one  would  seem  to 
look  for  imprecedented  military  aggression  from 
a  nation  with  shattered  army  and  depleted  popu- 
lation, the  other  assumed  an  equally  unprec- 
edented commercial  competition  from  a  coimtry 
stripped  of  raw  material,  denuded  of  surplus  cap- 
ital, drained  of  its  able-bodied  laborers,  and  sad- 
dled with  a  depreciated  currency. 

All  such  considerations  were  left  to  get  a  hear- 


OPPOSING  CONSIDERATIONS      223 

ing,  when  the  declaration  of  the  Paris  conference 
should  come  up  for  debate  before  the  legislative 
bodies.  But  in  the  meantime,  outside  observers 
recognized  three  aspects  of  the  matter  which  had 
apparently  received  scant  consideration  from  the 
delegates  at  Paris.  In  so  far  as  the  proposed 
agreements  were  defensive,  not  offensive,  they 
would  amoimt  to  confessing  fear  of  the  very  nation 
which  (supposing  the  defeat  of  Germany)  had 
just  been  conquered.  That  attitude  would  at 
least  be  novel  and  anomalous  for  a  victorious 
coalition.  In  so  far  as  they  were  offensive  and  not 
defensive,  they  would  be  public  declaration  of 
economic  war,  to  be  made  a  source  of  future  bit- 
terness, acrimony,  and  renewed  political  intrigue, 
at  the  very  moment  when  the  disastrous  military 
war  had  been  happily  concluded. 

But  in  the  third  place,  it  was  difficult  to  deny 
that,  while  what  England,  France,  Italy,  and 
Russia  would  gain  from  exclusion  of  German 
trade  would  be  highly  problematical,  what  they 
would  lose  would  be  certain.  Back  of  all  questions 
of  "dumping,"  "commercial  invasion,"  and  "bal- 
ance of  trade"  stood  the  quite  imdeniable  fact 
that  Germany,  with  her  thrifty  population  and 
her  enormous  import  requirements,  will  continue 
to  be  one  of  the  most  profitable  markets  in  the 
world.  It  will  hardly  be  supposed  that  exclusion, 
partial  or  complete,  of  German  products  from  the 


224     THE  ECONOMIC  AFTERMATH 

Allied  markets,  would  not  provoke  retaliation  in 
kind  on  the  part  of  Germany.  But  if  so,  then  the 
upshot  of  such  attempts  to  obstruct  by  arbitrary 
edict  the  normal  movement  of  commercial  inter- 
course would  necessarily  be  to  transfer  such  op- 
portunities, in  the  rich  field  of  Germany's  foreign 
trade,  to  neutral  markets  which  were  already 
threatening  Great  Britain's  commercial  suprem- 
acy. A  decision  of  the  Allied  countries  to  dispense 
with  German  goods  would  quite  as  inevitably 
compel  their  own  recourse  to  the  American  pro- 
ducers on  a  scale  of  exceptional  magnitude.  Even 
if,  under  such  conditions,  English  and  German 
exporters  should  endeavor  to  find  in  the  American 
market  compensation  for  their  loss  of  Anglo- 
German  trade,  the  salient  fact  would  be  the  fur- 
ther immense  advance  in  commercial  prestige  by 
the  United  States — at  the  expense  of  the  Euro- 
pean markets,  yet  by  the  deliberate  act  of  the 
European  Powers. 

It  was  not  easy  to  imagine  England,  at  any 
rate,  embarking  on  so  suicidal  a  commercial  policy. 
When  all  the  surrounding  circumstances  were 
considered,  it  seemed  far  more  reasonable  to  sup- 
pose that  the  English  delegates,  at  any  rate, 
indorsed  the  Paris  proposals  as  in  the  natiu-e  of  a 
threat  to  Germany  of  what  might  happen  if  her 
government  did  not  presently  come  to  terms  and 
end  the  war.    The  military  policies  of  the  Hohen- 


TEACHINGS  OF  HISTORY         225 

zollems  had  more  than  once  been  halted  or  di- 
verted by  pressure  from  the  commercial  interests 
of  the  Empire.  But  this  whole  question,  like  the 
multitude  of  other  imcertainties  created  during 
the  progress  of  the  war,  was  bound  to  remain  in 
the  realm  of  conjecture  and  dispute  until  the 
actual  hour  of  international  readjustment  should 
arrive. 

It  is  conceivable  that  the  bitterest  animosities 
of  this  war  will  survive  into  future  generations; 
yet  that  is  not  altogether  the  teaching  of  the  past. 
Thackeray's  celebrated  "Waterloo  chapter"  con- 
cluded with  a  prediction  of  indefinitely  continued 
political  enmity  between  France  and  England; 
but  the  only  two  subsequent  wars  in  which  both 
have  been  engaged  have  seen  their  armies  fight- 
ing side  by  side  against  a  common  antagonist. 
When  the  reader  of  history  recalls  the.  Prussian 
commander's  insistence  after  Waterloo,  that  Na- 
poleon be  put  to  death  by  the  victorious  Allies, 
or  the  demand  for  the  South 's  political  subjugation 
after  the  Confederate  armies  had  surrendered,  or 
the  declaration  by  the  London  Times  in  18 14 
(when  even  the  British  ministry  was  planning  to 
settle  our  "War  of  1812"),  that  "to  be  consistent 
with  ourselves,  we  must  maintain  the  doctrine  of 
*No  Peace  with  James  Madison,'  "  he  will  at 
least  be  compelled  to  acknowledge  that  the  last 
stages  of  a  bitter  and  angry  conflict  are  not  the 


226  THE  ECONOMIC  AFTERMATH 

hour  when  the  clearest  views  of  future  relation- 
ships may  be  obtained. 

No  doubt,  it  was  a  changed  France  with  which 
reconciliation  became  possible  to  England;  a 
**New  South"  which  opened  the  way  to  the  Union 
as  this  generation  knows  it,  and  an  altered  Eng- 
land whose  present  relations  with  the  United 
States  have  replaced  the  underlying  animosity 
which  the  Revolutionary  War  and  the  War  of 
1812  left  behind  them.  But  this  means  that  if 
we  read  by  the  analogy  of  history,  it  will  be  another 
and  a  different  Germany  with  which  other  nations 
will  reconstruct  relationships  in  the  longer  future. 


CHAPTER   XII 
EUROPE  AND  AMERICA 

PERHAPS  it  was  the  very  brilliancy  of  the 
economic  fortune,  brought  by  the  war  to 
the  United  States,  which  served  to  intensify 
misgiving  as  to  this  country's  possible  situation 
when  the  war  ends.  Even  in  speeches  and  con- 
vention declarations  of  the  presidential  campaign 
in  1 91 6,  reference  was  constantly  made  to  the 
** temporary"  character  of  our  war-time  prosper- 
ity. That  some  essential  elements  in  this  sudden 
prosperity  would  not  outlast  the  war,  nobody  de- 
nied. We  could  expect  no  more  $2,000,000,000 
*' excess  of  exports."  Our  huge  outward  trade 
in  war  material  of  every  sort  was  boimd  to  end 
on  return  of  peace.  Prices  for  metals  and  com- 
modities indispensable  to  war  were  certain  to 
come  down  from  their  extravagant  heights.  Prof- 
its of  the  shipping  trade — which,  with  the  driving 
of  Germany's  merchant  marine  from  the  sea  and 
the  drafting  of  England's  into  war  service,  added 
500  or  1,000  per  cent  to  freight  rates — ^will  be 
subject  to  extensive  and  perhaps  early  readjust- 
ment.    To  what  extent  the  ending  of  the  war, 

227 


228  EUROPE  AND  AMERICA 

and  the  release  of  Europe's  fleets  for  peaceful 
commerce,  would  affect  our  war-time  activities 
in  trade  with  South  America  and  Asia,  was  at 
least  a  problem  to  be  considered. 

There  were  considerations  on  the  other  side. 
Many  American  industries,  cramped  for  lack  of 
their  accustomed  raw  materials,  would  be  in- 
stantly benefited  by  the  ending  of  the  war  block- 
ades. The  foreign  market  for  our  cotton,  so  largely 
cut  off  by  the  war  as  to  compel  reduction  of  more 
than  20  per  cent  in  the  annual  American  crop, 
would  be  completely  reopened.  But  behind  all 
these  generally  recognized  probabilities  there  re- 
mained one  great  uncertainty;  which,  as  time 
went  on,  occupied  more  of  the  American  business 
community's  attention.  That  was  the  question 
whether  Europe — ^its  people  impoverished  by 
war,  its  manufacturers  suddenly  deprived  of  de- 
mands for  war  material,  and,  in  Germany's  case, 
its  whole  productive  industry  in  touch  again 
with  a  foreign  market  lost  since  the  war  began — 
will  not  instantly  pour  into  the  rich  United  States 
so  immense  a  mass  of  manufactured  goods,  offered 
at  very  low  prices  fixed  by  the  urgent  needs  of  the 
European  producer,  as  to  cut  off  our  own  manu- 
facturers from  the  market.  This  picture  seemed 
on  its  face  convincing;  the  result  appeared  to 
follow  the  logic  of  the  situation.  Our  own  govern- 
ment has   already  begun   tentatively  to  discuss 


FEELING  AS  TO  THE  WAR       229 

measiires  which  might  be  necessary  to  avert  or 
modify  the  disorganizing  effect  on  American  in- 
dustry. Platforms  of  both  political  parties,  as 
adopted  for  the  presidential  campaign  of  191 6, 
recognized  such  an  economic  sequel  to  the  Euro- 
pean War  as  an  imminent  possibility. 

Many  of  the  circumstances  of  the  day  conspired 
to  emphasize  such  misgivings.  The  extraordinary 
situation  which,  with  the  prolongation  of  the  war, 
had  arisen  throughout  the  world;  the  increasing 
jeopardy  to  which  (as  at  the  similar  juncture  of 
the  Napoleonic  wars)  the  rights  of  neutral  states 
and  people  were  subjected;  the  rising  emphasis 
and  bitterness  which  marked,  on  the  one  hand,  the 
feelings  of  the  belligerents  toward  one  another, 
and,  on  the  other  hand,  the  sympathies  of  neu- 
trals— all  these  foimd  expression  in  the  financial 
as  in  the  political  incidents  of  the  day.  It  is  rea- 
sonably safe  to  say  that  nowhere  did  they  influ- 
ence news  and  tinge  controversy  as  in  the  United 
States.  Our  State  Department's  attitude,  the 
momentary  clash  of  the  President  with  Congress 
over  the  "submarine  dispute"  with  Germany,  the 
tense  public  excitement  over  the  battle  news,  and 
the  recourse  to  public  meetings  convened  to  urge 
one  policy  or  another,  clearly  enough  reflected 
these  aspects  of  the  situation.  So,  also,  the  re- 
peated agitation  and  disorder  on  the  stock  ex- 
change have  reflected  them;   it  has  been  a  very 


230  EUROPE  AND  AMERICA 

different  picture,  since  191 6  began,  from  the  tin- 
bounded  confidence  of  191 5,  when  the  eyes  of 
Wall  Street  were  fixed  almost  exclusively  on  this 
country's  own  prosperity.  The  spread  of  the  po- 
litical and  popular  movement  for  ''preparedness" 
was  a  natural  outcome  of  the  surrounding  influ- 
ences. 

For  the  sudden  vogue  of  the  "military  pre- 
paredness" propaganda,  there  seemed,  in  the  view 
of  the  ordinary  calm  observer,  to  be  several  dif- 
ferent causes.  One,  and  undoubtedly  the  most 
convincing,  was  the  belief  that  for  actual  defensive 
purposes,  our  land  forces  were  not  such  as  to 
admit  either  of  immediate  effective  resistance  or 
of  rapid  expansion  into  an  armament  which  would 
be  effective.  This  consideration,  to  be  sure,  was 
of  itself  no  more  true  ini9i5orini9i6  than  it  was 
ten  years  ago,  or  a  quarter  of  a  century  ago.  Par- 
ticular incidents  of  the  European  War,  however, 
had  instilled  into  the  minds  of  many  people  the 
further  idea  that  things  may  happen  in  this  world 
of  ours  whose  occiurence  we  supposed,  as  recently 
as  the  middle  of  1914,  to  be  wholly  inconceivable. 
This  could  not  fail  to  be  a  powerful  secondary 
influence  in  the  ** preparedness"  discussion. 

Yet  no  one  can  have  missed  the  third  influence: 
the  presence  in  the  United  States  (and  elsewhere 
throughout  the  world)  of  an  emotional  hysteria, 
engendered  in  very  infectious  form  by  the  contro- 


"  PREPAREDNESS  "  23 1 

versies  of  the  war.  It  has  not  been  easy  for  any 
individual  to  keep  himself  in  hand,  so  to  speak, 
during  this  clash  of  strong  emotions — ^which,  as 
a  matter  of  fact,  could  not  possibly  be  avoided, 
even  in  the  every-day  conversation  of  the  office, 
the  club,  or  the  dining-table.  Coming  on  top  of 
the  actual  events  of  the  present  war,  this  violence 
of  feeling,  and  the  inevitable  resultant  extrava- 
gance of  inference,  rendered  peculiarly  difficult 
the  sane  and  sober  discussion  of  problems  of  na- 
tional defense. 

In  many  respects,  it  was  these  same  three  in- 
fluences which  aroused  discussion  over  what  has 
received  the  imitative  title  of  "economic  prepared- 
ness"— ^meaning  the  adjustment  of  our  financial 
machinery  and  business  methods  to  whatever  con- 
ditions may  be  expected  to  prevail  after  the  war. 
Fortunately  for  the  usefulness  of  the  discussion, 
it  was  not  conducted  on  the  emotional  pitch  which 
frequently  characterizes  the  **  military  prepared- 
ness" propaganda.  In  the  field  of  world-politics, 
the  unexpected  events  which  have  occurred  since 
the  war  began  might  be  construed  into  a  groimd 
for  misgiving  as  to  our  own  coimtry's  position. 
But  the  imexpected  financial  events  in  our  coim- 
try's trade,  finance,  and  industry,  were  almost 
wholly  of  a  character  to  reassure  the  American 
mind.  Beyond  even  this,  the  questions  with  which 
the  economic  problem  had  to  deal  were  severely 


232  EUROPE  AND  AMERICA 

practical,  and  have  to  be  judged  by  practical  ex- 
perience— ^in  which  they  differ  considerably  from 
discussions  based  on  the  hypothetical  possibility 
of  invasion  of  the  United  States  by  the  German 
army. 

For  one  instance,  the  very  familiar  and  very 
much  overworked  assertion  that,  at  the  end  of 
the  war,  the  United  States  would  be  left  without 
a  friend  in  the  world,  did  not  greatly  impress  the 
practical  financial  mind.  The  man  of  some  ex- 
perience in  affairs,  whether  at  home  or  internation- 
ally, does  not  expect  that  a  neutral  state,  lifted 
to  high  individual  prosperity  by  the  incidents  of 
a  foreign  war,  will  be  regarded  with  the  kindest  of 
feelings  by  belligerent  nations  struggling  under 
the  burden  of  the  conflict.  Though  it  is  not  the 
neutral's  fault,  he  is  certainly  gaining  where  they 
are  losing. 

The  practical  man  remembers,  if  he  is  familiar 
with  history,  that  France  and  England  looked 
with  by  no  means  imconcealed  irritation  at  the 
'* business  boom"  in  this  country  during  the  early 
years  of  the  Napoleonic  wars,  and  that  the  Con- 
tinent had  much  the  same  feeling  with  regard  to 
England  during  1870  and  1871.  But  the  notion 
that,  whatever  might  be  the  individual  sympathies 
of  our  people  in  the  European  War,  every  one  of 
the  European  belligerents  had  come  to  hate  the 
United  States,  and  would  be  its  enemy  hereafter 


ECONOMIC  INVASION  233 

because  our  government,  as  a  government,  had 
not  departed  from  its  neutrality  and  openly 
favored  one  side  or  the  other,  could  not  fail  to 
appeal  to  intelligent  and  thoughtful  men  as  a 
wild  absurdity.  The  slightest  reflection  on  the 
facts  of  the  situation,  as  the  end  of  the  war  drew 
nearer,  would  convince  him  that  the  financial  and 
political  friendship  of  the  United  States  was  cer- 
tain to  be  the  great  prize  for  which  Europe  would 
contend. 

Still,  it  was  a  curious  fact  that  the  practical 
business  man,  who  rejected  out  of  hand  the  fore- 
cast of  an  isolated  and  friendless  post-bellum 
America,  began  his  own  ** preparedness"  discus- 
sion with  the  talk  of  possible  invasion.  What  he 
meant,  however,  was  the  ** dumping"  of  low-priced 
European  merchandise  in  this  coimtry  when  the 
war  was  over;  the  "flooding  of  the  American 
market"  with  competitive  goods;  the  "economic 
invasion."  Now,  invasion  of  this  sort  is  not  a 
new  source  of  misgiving,  even  in  the  minds  of 
statesmen.  A  quarter  of  a  century  ago,  not  only 
America  but  Europe  was  anxiously  discussing  a 
prospective  invasion  by  Asiatic  merchandise. 
When  England  and  the  Continent  then  talked  of 
the  "yellow  peril,"  they  did  not  at  all  mean  im- 
migration from  China  and  Japan,  but  products 
of  Chinese  and  Japanese  manufacture.  It  was 
less  than  two  decades  ago  when  the  minister  of 


234  EUROPE  AND  AMERICA 

foreign  affairs  in  a  European  cabinet,  addressing 
the  legislative  body,  declared  that  ''European 
nations  must  close  their  ranks  and  fight  shoulder 
to  shoulder"  if  ''the  vital  interests  of  the  Euro- 
pean people  are  not  to  be  gravely  compromised," 
and  by  nothing  less  than  the  threatened  invasion 
of  American  manufactures. 

The  fright  to  which  Coimt  Goluchowski's 
speech  gave  expression — at  a  time  when  American 
manufacturers,  emerging  from  the  panic  of  1893, 
were  setting  forth  to  discover  in  the  export  trade 
an  outlet  which  the  depressed  home  market  did 
not  offer — disappeared  when  reviving  prosperity 
in  the  United  States  itself  relieved  the  pressure. 
A  few  months,  and  the  "American  peril"  was  as 
completely  forgotten  as  the  "yellow  peril,"  and 
the  fact  may  not  be  without  bearing  on  the  pres- 
ent controversy.  Yet  the  incident  suggests  anal- 
ogies in  both  directions.  The  present  belligerent 
states  of  Europe  will  at  least  repeat,  after  the 
war,  the  case  of  a  depressed  home  market,  and  the 
United  States  will  repeat  the  case  of  an  inviting 
objective  point  for  export  trade.  Is  it  our  busi- 
ness, then,  to  begin  by  raising  higher  and  higher 
protective  tariffs  in  advance  of  the  post-bellum 
*  *  European  invasion ' '  ? 

The  question  might  be  argued  on  the  basis  of 
this  country's  ambition  to  retain  its  present  place 
as  the  central  money  market  of  the  world.    On 


QUESTIONS  OF  POLICY  235 

that  ground  alone,  the  proposal  to  begin  our 
career  in  economic  primacy  by  protecting  oiu*  own 
markets  against  competing  foreign  nations  is  a 
bit  anomalous.  London's  economic  primacy  of 
our  day  was  built  up  on  the  absolute  free-trade 
policy  of  England.  There  are  those  who  believe 
that  the  exigencies  of  war  expenditure  are  al- 
ready driving  England  to  the  familiar  **  revenue 
tariff  with  incidental  protection,"  and  our  own 
national  experience  teaches  that  such  a  tariff  is 
a  stepping-stone  to  a  protective  tariff  with  in- 
cidental revenue.  Hypothetically,  and  as  a  pure 
matter  of  economic  strategy,  one  might  suppose 
that  the  sceptre  of  world  finance  might  most 
surely  be  grasped  by  seizing  also  the  weapon  with 
which  England  won  it. 

Governmental  policies  are  not  always  settled 
nowadays,  however,  on  the  basis  of  general  prin- 
ciples. The  question  must  still  be  answered, 
whether  America  will  not  be  "flooded  with  cheap 
Eturopean  merchandise'*  after  the  war,  and  to 
answer  it  we  have  no  precedent  to  guide  us.  It  is 
true  that,  in  the  year  when  the  long  Napoleonic 
conflict  in  Europe  came  to  an  end,  this  country's 
merchandise  imports  rose  to  $113,000,000,  as 
against  $12,900,000  the  year  before;  and  that  the 
next  year  they  broke  all  precedent.  But  the 
United  States  had  itself  been  at  war  with  a  Euro- 
pean Power,  from  181 2  to  the  end  of  1814.    The 


236  EUROPE  AND  AMERICA 

sudden  inrush  of  imported  English  merchandise, 
on  return  of  peace,  was  not  then  described  as  an 
industrial  calamity,  but  as  trade  revival.  The 
goods  were  sorely  needed;  their  arrival  in  our 
markets  foreshadowed  business  activity  and  re- 
turn of  better  times.  Nevertheless,  England  un- 
doubtedly began  then  to  undersell  the  outside 
producing  world.  Why  will  not  both  England 
and  continental  Europe,  when  this  war  ends,  set 
to  work  at  the  same  task  in  order  to  relieve  their 
own  economic  btirden  ? 

The  lesson  of  the  world's  experience,  thus  far 
in  the  war,  has  been  that  confident  prophecy  of 
results  from  the  powerful  economic  causes,  visibly 
at  work,  is  rash.  But  that  same  experience  has 
also  shown,  as  we  have  seen  repeatedly  in  our  nar- 
rative, that  prediction  has  been  most  imlucky 
when  it  arose  from  impulsive  expectation  of  the 
worst,  and  when  it  was  based  on  assumption  that 
the  most  alarming  economic  incidents  of  older 
wars  were  bound  to  be  repeated.  Keeping  in 
mind  these  reservations,  the  first  answer  to  be 
made  to  the  above-stated  question  is,  that  the 
particular  conditions  which  prevailed  in  the  after- 
math of  Waterloo  can  hardly  be  duplicated.  In 
the  dozen  years  after  1815,  the  economic  history 
of  Europe  was  a  tale  of  production  with  labor  at 
starvation  wages.  Tooke,  the  economic  his- 
torian of  the  period,  describes  the  interval  from 


A  CENTURY  AGO  237 

i8i4toi8i6as  one  of  "losses  and  failures  among 
the  agricultural  and  commercial  and  manufactur- 
ing and  mining  and  shipping  and  building  inter- 
ests, which  marked  that  period  as  one  of  most 
extensive  suffering  and  distress."  Readers  of 
"Tom  Brown"  will  remember  the  narrative  of 
the  English  parish  "which  had  risen  into  a  large 
town  during  the  war,  and  upon  which  the  hard 
years  which  followed  had  fallen  with  a  fearful 
weight";  "masters  reducing  their  establishments, 
the  fearful  struggle  between  the  employers  and 
men;  the  lowering  of  wages."  The  memoirs,  the 
histories,  even  the  fiction  of  the  period,  are  crowded 
with  such  dismal  facts. 

The  hard  times  in  Eiu-ope  will  follow  this  war 
as  they  followed  that  of  a  century  ago;  but  it  is 
far  from  being  an  equal  probability  that  cheap 
European  labor,  which  was  the  basis  of  such  "eco- 
nomic invasion"  as  occurred  after  181 5,  will  be  a 
sequel  to  this  war.  It  was  England  which,  in  the 
vernacular  of  to-day,  "flooded  the  world's  mar- 
kets" with  low-priced  manufactures.  But  Eng- 
land's labor  supply  had  not  then  been  depleted 
through  a  continuous,  violent,  and  destructive 
conflict  on  the  land.  The  British  army's  losses  in 
Wellington's  Spanish  campaign,  even  if  added  to 
the  losses  at  Waterloo,  would  hardly  match  the 
English  losses  in  a  single  month  on  the  present 
Western  front. 


238  EUROPE  AND  AMERICA 

With  her  present  loss  of  available  laborers,  and 
with  even  women's  work  in  factories  largely  a 
temporary  expedient  of  war,  the  natural  outcome, 
all  other  influences  remaining  equal,  would  be  that 
employers  must  bid  for  labor.  All  other  influences 
may  not  be  equal ;  it  is  possible  that,  in  the  period 
of  financial  exhaustion  after  war,  the  home  de- 
mand for  goods  will  be  as  much  reduced  as  the 
supply  of  labor.  Yet,  as  against  even  this  con- 
tingency, there  remains  the  immistakable  fact 
that  the  Labor  party,  even  in  this  time  of  war, 
has  held  the  balance  of  power  in  the  English 
Parliament,  and  that,  immediately  prior  to  the 
war,  it  was  dictating  minimum  wages,  through  the 
ministry  and  Parliament. 

But  this  is  not  the  only  consideration  bearing 
on  the  economic  sequel.  It  is  recognized,  even  in 
the  programme  of  economic  policy  adopted  by 
the  Allies  in  1916,  that  the  first  necessity  of  con- 
tinental Europe  after  peace  will  be  immense  sup- 
plies of  new  material  for  reconstruction  of  its 
shattered  cities,  damaged  railways,  bridges,  har- 
bors and  fortifications,  and  overworked  industrial 
establishments.  To  provide  this  new  material,  it 
will  find  itself  with  factories  whose  machinery 
has  been  altered  to  make  guns  and  ammtmition, 
and  with  the  supply  of  able-bodied  laborers  enor- 
mously reduced  by  loss  in  battle.  Demands  on 
Europe's  productive  energies  for  the  purpose  will 


LABOR  CONDITIONS  AFTER  WAR    239 

be  very  great ;  some  of  our  own  most  experienced 
manufacturing  authorities  hold  that  the  circum- 
stances insure  an  export  trade  from  the  United 
States  to  Europe,  after  war  is  over,  of  abnormally- 
large  proportions.  It  has  been  publicly  stated, 
by  high  authority  in  Germany's  productive  in- 
dustry, that  a  year  and  a  half,  after  return  of 
peace,  will  be  required  "merely  to  resupply  our 
coimtries  with  the  things  that  have  been  used  up 
during  the  war." 

In  the  early  part  of  191 6,  the  Associated  Press 
correspondent  at  Berlin  interviewed  nimierous 
high  authorities  in  German  industry  on  the  ques- 
tion, how  the  German  people  would  be  able  to 
bear  the  heavy  burden  of  taxation,  recognized  as 
an  inevitable  sequel  to  the  war.  The  director- 
general  of  the  great  Siemens- Halske  electrical 
company  replied  that  the  burden  would  be  offset 
by  increased  wages.  **  To-day  in  Germany,"  he 
declared,  *' wages  are  imprecedentedly  high,  and 
the  return  of  a  few  million  soldier-workmen  will 
not  drive  them  down."  A  director  of  the  largest 
private  bank  in  Germany  went  further,  stating  it 
as  his  opinion  that  the  "heavy  taxation  following 
the  war  will  necessitate  general  advance  in  both 
salaries  and  wages";  a  prediction  supplemented 
by  a  high  economic  expert  with  the  remark  that 
if  the  employers  will  not  voluntarily  raise  wages, 
then  the  advance  "must  be  forced  by  those  who 


240  EUROPE  AND  AMERICA 

need  it."  But  higher  wages  are  not  the  road  to 
cheap  competitive  production. 

As  for  France  and  Russia,  the  task  of  preparing 
for  large  purchases  from  the  United  States  when 
war  is  over — especially  of  mechanical  appliances 
for  use  in  agriculture  and  other  productive  indus- 
try, has  long  been  tmder  way  in  its  preliminary 
stages.  A  careful  review  of  the  matter  by  a  well- 
informed  Paris  correspondent,  at  the  time,  con- 
cluded that  in  France,  during  the  period  immedi- 
ately following  return  of  peace,  there  will  be 
*'no  chance  for  either  plentiful  or  cheap  labor  for 
surplus  production,'*  and  that  "for  some  time 
after  war,  demands  on  the  United  States,  so  far 
as  France  is  concerned,  will  be  quite  as  large  and 
quite  as  urgent  as  during  the  war  itself."  This 
view  of  the  question  was  publicly  confirmed  by 
members  of  a  commission,  sent  from  France  as 
official  representatives  of  the  French  Government 
and  the  various  French  industries,  with  the  an- 
nounced purpose  of  ascertaining  how  the  needs  of 
industrial  France,  in  the  period  of  reconstruction 
after  war,  could  best  be  met  from  the  manufac- 
turing facilities  of  this  country.  Members  of  this 
commission  estimated  that,  for  machinery  alone, 
the  new  orders  of  this  nature  might  reach  $i6o,- 
000,000. 

These  aspects  of  the  European  situation  in 
regard  to  labor  supply,  wage  scales,  and  capacity 


PROBLEMS  OF  THE  FUTURE  241 

for  production,  may  not  finally  determine  the 
nature  of  transatlantic  competition.  There  would 
still  remain  the  problem  of  what  conditions  will 
exist  when  the  period  of  reconstruction  is  com- 
pleted, or  of  what  will  be  the  course  of  wages  in 
this  coimtry.  Demands  for  an  increase  have 
been  greatly  emphasized  during  the  more  recent 
months  of  war.  But  I  have  shown  at  least 
that  the  question,  whether  Europe  will  not  in- 
stantly **dimip"  its  products  on  our  home  mar- 
kets and  in  our  export  field,  at  prices  with  which 
American  industry  cannot  compete,  is  by  no  means 
one-sided.  It  cannot  be  safely  determined  in  ad- 
vance by  the  precedent  of  older  wars. ,  How  many 
circumstances  peculiar  to  the  present  war  stir- 
round  it,  may  be  judged  from  the  single  fact  that 
experienced  students  of  the  immigration  problem 
have  frankly  confessed  their  inability  to  decide 
what  will  be  the  probable  outcome  in  that  field — 
an  imprecedented  rush  of  European  peasants  and 
laborers  to  the  United  States,  to  escape,  once  for 
all,  the  horrors  of  militant  Europe;  or  wages  in 
industrial  Europe,  high  enough  to  retain  its  la- 
borers, or,  possibly,  outright  governmental  em- 
bargo on  emigration  from  the  coimtries  of  conti- 
nental Europe.  That  expedient  would  be  new 
to  Europe's  history,  yet  no  more  unprecedented 
than  many  another  expedient  already  actually 
adopted,  in  the  war  period  itself. 


242  EUROPE  AND  AMERICA 

Such  are  the  interesting  and  unusual  elements 
of  uncertainty  which  siuroimd  the  question  of 
the  conditions  which,  in  oiu*  own  coimtry  as  in 
belligerent  Europe,  will  arise  with  return  of  peace. 
It  is  undoubtedly  fortunate  that  the  American 
people  themselves  have  lent  a  readier  ear  to  pre- 
diction of  possible  danger  than  to  prediction  of 
unchecked  American  prosperity.  Merchants  and 
manufactiu-ers  who  have  been  gaining  the  largest 
profits  have  been  the  most  conservative  in  guard- 
ing their  financial  position  against  the  possible 
great  reaction.  Speculation  on  the  stock  exchanges 
as,  not  only  in  shares  of  war  munition  manufac- 
tories but  in  securities  of  companies  conducting 
the  business  of  ordinary  times,  was  held  in  check 
even  at  the  height  of  the  rise  in  prices  dur- 
ing 191 5.  If  the  misgivings  expressed  so  widely 
regarding  the  economic  sequel  in  the  United 
States  were  all  to  be  fulfilled  in  the  event,  the 
result  would  at  least  not  take  our  financial  and 
industrial  commxmity  unprepared. 

The  country  itself  is  prepared  in  still  other 
ways  for  whatever  vicissitudes  the  aftermath  of 
war  may  bring  to  it.  The  undoubtedly  immense 
expansion  of  credit  has  been  based  on  an  unprece- 
dented accumulation  of  gold.  The  abnormally 
great  increase  of  our  exports  to  belligerent  Europe 
has  been  offset  by  repurchase  of  possibly  the 
greater  part  of  the  securities  representing  our 


A  NEW  WORLD  243 

standing  indebtedness  to  the  outside  world.  If 
the  strain  of  economic  reconstruction  in  Europe 
is  to  affect  the  American  money  market,  we  have 
the  machinery  of  a  soimd  and  scientific  banking 
system,  with  its  facilities  ready  for  instant  use 
and  as  yet  hardly  employed.  It  is  these  well- 
known  facts  which  are  the  basis  for  the  state- 
ment, by  one  of  the  most  experienced  members  of 
the  Federal  Reserve  Board,  that  **the  United 
States  have  so  strengthened  their  economic  posi- 
tion among  the  nations  of  the  world  that,  to  a 
substantial  extent,  they  must  take  the  place  of 
the  European  nations  which  acted  as  the  world's 
bankers  before  the  war." 

Out  of  the  numerous  predictions  made  when 
the  war  broke  out — ^most  of  which,  as  we  have 
learned  in  the  coiu-se  of  our  narrative,  turned  out 
to  be  mistaken — the  one  prediction  accepted  tman- 
imously  by  thoughtful  men  was  that  the  world 
which  emerges  from  this  epoch-making  conflict 
will  not  be  the  world  which  we  knew  before  19 14. 
This  prediction  was  most  frequently  made  of 
political  institutions  and  relations;  sometimes  of 
social  institutions.  It  may  be  ventured  quite  as 
safely  in  regard  to  economic  institutions  and  re- 
lations. The  spirit  in  which  the  United  States 
will  meet  the  test  of  these  new  conditions  may 
reasonably  be  one  of  soberness,  but  of  hope  and 
confidence. 


INDEX 


Aftermath  of  war,  political  problems 
of,  2;  difficulties  of,  due  to 
war-time  paper  inflation,  161, 
162;  probable  incidents  of,  1 91- 
194;  its  character,  in  other  wars, 
195, 196;  in  period  after  Water- 
loo, 197;  conditions  governing, 
on  present  occasion,  198-201; 
probable  character  of,  in  France, 
20s;  in  Germany,  206-210;  in 
England,  210-215;  trade  pro- 
gramme of  Germany's  enemies 
regarding,  217-224;  possible 
economic  incidents  of,  235;  in 
other  wars,  235,  236;  in  the 
U.  S.,  242,  243. 

Aldrich-Vredand  currency  law,  its 
origin  and  purpose,  86;  its  op- 
eration in  1914,  87,  88;  Eng- 
land's plans  for  a  similar  cur- 
rency, 87;  increase  of,  during 
early  months  of  war,  104;  final 
retirement  of,  107,  155. 

American  securities,  Europe's  hold- 
ings of,  predictions  of  19 14  re- 
garding, 17;  effort  of  Europe 
to  sell,  in  1914  panic,  82;  char- 
acter of  selling,  when  stock  ex- 
change reopened,  83;  New 
York's  repurchases  of,  from 
Europe,  132,  135,  152;  sales  of, 
to  Europe  before  the  war,  152; 
London's  sales  of,  in  first  two 
years  of  war,  175;  estimate  of 
European  holdings  of,  in  1914 
and  1915,175;  English  holdings 
of,    bought    or   borrowed    by 


British  treasury,  175,  176; 
French  Government's  purchases 
of,  176;  used  in  New  York  as 
collateral  for  British  Govern- 
ment loan,  176;  effect,  on  Lon- 
don's economic  future,  of  their 
resale  to  U.  S.,  213;  redemp- 
tion of,  its  influence  on  economic 
future  of  U.  S.,  242. 

Anglo-French  loan  of  1915,  commis- 
sion sent  to  U.  S.  to  arrange, 
170;  amount  proposed  at  $1,- 
000,000,000,  170;  reduced  to 
$500,000,000,  171;  terms  of, 
171;  American  market's  atti- 
tude toward,  171,  172;  its  pri- 
mary purpose,  173;  its  effect  on 
foreign  exchange,  173;  pro- 
ceeds of,  how  expended,  173, 
174;  itsinvestment  status,  174. 

Asquith,  H,  H.,  British  premier, 
statement  of  191 5  on  peace 
proposals,  184,  185;  intimates 
possible  terms,  189. 

Austria,  her  idtimatum  to  Servia, 
21;  financial  panic  in,  29;  de- 
predation of  exchange  rates  on, 
167. 

Balkan  War  of  191 2  and  1913, 
hoarding  of  gold  during,  26; 
effect  of,  on  European  money 
markets,  27;  how  terminated, 
190. 

Bank  Act,  previous  suspension  of, 
at  London,  37;  suspension  au- 
thorized in  1914  but  refused,  38. 


245 


246 


INDEX 


Bank  checks,  increased  amount  o£ 
drawn  in  1915  in  U.  S.,  135;  all 
records  surpassed  by,  136. 

Bank  of  England,  run  on,  at  out- 
break of  war,  34;  peculiar  cir- 
cumstances of  run,  34,  35;  loss 
of  gold  in  panic  week,  35;  raises 
its  rate  to  10  per  cent,  38;  re- 
duces it,  38;  takes  over  non- 
collectible  bankers'  bills,  49; 
its  loans  during  war,  50,  51; 
establishes  Canadian  branch, 
100;  increase  in  gold  diuing 
early  months  of  war,  1 23 ;  heavy 
decrease  in  gold  holdings,  dur- 
ing 1915,  124;  slight  increase 
in  note  circulation,  dvuing  war, 
146;  relation  of,  to  London's 
gold  exports  in  the  war,  170; 
when  gold  payments  were  re- 
smned  by,  after  Napoleonic 
wars,  201. 

Bank  of  France,  war  loans  to  govern- 
ment and  note  issues,  148. 

Banks,  European,  reduction  of  rates 
at,  early  in  19 14,  28;  issue  of 
paper  currency  by,  148;  prob- 
lems of  note  issues,  after  peace, 
200. 

Banks  of  N.  Y.  City,  decrease  in  re- 
serves of,  during  war  panic,  87; 
unite  to  pay  the  city's  European 
debt,  99;  organize  to  ship  gold 
against  our  foreign  indebted- 
ness, 100;  moral  effect  of  their 
action,  10 1 ;  surplus  reserve  re- 
stored, 112. 

Belgium,  possible  effect  of  Germany's 
action  in,  on  conditions  after 
war,  216;  Allies  pledge  eco- 
nomic assistance  to,  218. 

Bethmann-Hollweg,  German  imperial 
chancellor,  statement  of  1915 
on  peace  proposals,  184,  185; 
intimates  possible  terms,  189. 

Blockade,  in  Europe  during  Napole- 
onic wars,  8, 13;  of  Germany  in 


this  war,  economic  influence  of, 
206. 
"Bullion  Committee"  of  1809;    its 
report  on  depreciation  of  ex- 
change in  war  time,  181. 

Canada,  gold  shipped  to,  in  1914, 
by  New  York,  100;  sends  gold 
back  in  1915,  124;  loans  to,  by 
New  York,  132. 

Civil  War  in  America,  financial 
events  at  outbreak  of,  4;  eco- 
nomic character  of,  5;  cost  per 
day,  9;  war  loans  of,  61,  65; 
increase  of  taxation  in,  71;  gold 
premium  and  paper  deprecia- 
tion in,  120;  character  of  stock 
market  during,  134;  inflation  of 
ciurency  in,  144,  145;  issue  of 
small  paper  money  in,  161; 
premature  proposals  for  peace 
in,  185,  186;  economic  sequel 
to,  in  the  North,  196;  in  the 
South,  197;  demand  for  South's 
subjugation  as  result  of,  225; 
reason  for  reconciliation  after, 
226, 

Clearing-house  certificates  of  N.  Y. 
banks,  origin  and  purpose  of, 
84;  issue  of,  in  19 14,  85;  re- 
tirement of,  108,  112. 

Consols,  British,  their  decline  in  Na- 
poleonic wars,  12;  their  fall  on 
eve  of  this  war,  30. 

Cooke,  Jay,  his  method  of  floating 
U.  S.  war  loan,  61. 

Cost  of  war,  influence  of,  on  popular 
expectations,  3;  estimates  be- 
fore this  war,  9;  amount  of,  in 
this  war,  54;  Germany's  the- 
ories of  meeting,  68;  propor- 
tion met  in  England  by  taxes, 
71- 

Cotton,  American  producers  of, 
dilemma  at  outbreak  of  war, 
90;  expedients  to  relieve,  91; 
effect  of  Civil  War  on  produc- 


INDEX 


247 


tion  of,  197;  probable  revival  in 
market  for,  after  this  war,  228. 
Currency  issues  during  war,  in  Eng- 
land, 44;  nature  and  amount 
of,  4s;  recourse  to,  by  other  na- 
tions, si;  in  Germany,  France, 
and  Russia,  14s;  in  England, 
146;  character  of,  147,  148;  ef- 
fects of,  on  the  markets,  149, 
150;  problem  of,  after  the  war, 
200. 


Debts  of  belligerent  states,  57,  58; 
see  also  War  loans. 

Duration  of  the  war,  predictions  re- 
garding, I. 

Economic  Conference  of  the  Allies  at 
Paris  in  19 16;  its  plans  for 
policy  after  war,  218-225; 
pledges  assistance  to  Belgium, 
Servia,  and  Poland,  218;  agrees 
on  defensive  economic  mea- 
sures; intimates  p>ermanent  anti- 
German  policy,  220,  221;  Wash- 
ington's view  regarding,  221; 
motive  of  its  proposals,  222, 
224;  objections  to  them,  223, 
224. 

"Economic  exhaustion,"  popidar 
theory  of,  61;  probabilities  re- 
garding, 62;  Macaulay  on,  63; 
precedent  of  other  wars  regard- 
ing, 65. 

"Economic  invasion,"  by  Evurope 
after  war,  predictions  of,  233- 
241;  of  Europe  by  Asia,  theory 
of,  233;  of  Eiu:ope  by  America, 
predicted  in  1897,  234;  of  out- 
side world  by  England,  after 
Napoleonic  wars,  236. 

Economic  War,  see  Economic  Con- 
feronce. 

England,  attitude  of  191 1  toward 
France  and  Germany,  26;  cur- 
rency of,  in  1914  panic,  34,  44, 


45 ;  war  taxation  of  1914  in,  69; 
enormous  increase  of  taxes  in, 
70,  71;  her  shaken  economic 
prestige,  118;  commission  from, 
to  confer  on  American  situation, 
123;  increase  of  paper  currency 
in,  during  1915  and  1916,  146; 
depreciation  in  exchange  on, 
167;  causes  of,  168;  places$soo,- 
000,000  Anglo-French  loan, 
170;  its  holdings  of  American 
securities,  175;  government  of, 
buys  or  borrows  foreign  securi- 
ties from  English  investors,  176; 
borrows  $250,000,000  on  col- 
lateral security  at  New  York, 
176;  her  economic  position 
after  Transvaal  War,  195;  after 
Napoleonic  wars,  199;  position 
of,  on  outbreak  of  this  war,  202; 
origin  of  her  financial  and  in- 
dustrial prestige,  209;  impair- 
ment to  prestige  of,  during  this 
war,  211-213;  financial  history 
of,  in  Napoleonic  wars  and  in 
this  one,  211;  position  after 
war,  compared  with  other  Eu- 
ropean states,  212;  reasons  for 
and  against  maintenance  of 
former  position,  213,  214;  polit- 
ical power  of,  as  shown  by  this 
war,  215;  her  trade  with  Ger- 
many before  the  war,  216;  as- 
pects of  her  future  economic 
policy  toward  Germany,  224; 
relations  with  U.  S.  after  War 
of  1812,  226;  attitude  toward 
U.  S.  during  Napoleonic  wars, 
232;  Continent's  attitude  to- 
ward, in  Franco-Prussian  War, 
232;  her  large  exports,  after 
Napoleonic  wars,  236;  hard 
times  in,  during  decade  after 
Waterloo,  237. 
Europe,  political  and  economic 
status  of,  in  this  war,  2,  3;  ex- 
pected movement  of  gold  to, 


248 


INDEX 


18;  settlement  of  American 
debt  to,  102;  large  loans  to,  by 
American  markets,  132;  war- 
time currency  inflation  in,  145- 
146;  rise  of  commodity  prices 
in,  150;  issue  of  small  paper 
currency  in,  161;  estimated 
holdings  of  American  securities 
in,  i6i,  17s;  economic  condi- 
tion of,  after  Napoleonic  wars, 
197;  Lloyd-George's  prediction 
as  to  post-bellum  economic  re- 
action in,  20 1 ;  future  relation 
of  nations  in,  201-225;  finan- 
cial expedients  of  19 14  in,  not 
new,  210;  possible  "dumping" 
of  cheap  merchandise  by,  after 
war,  228;  poUtical  attitude 
toward  U.  S.,  on  return  of 
peace,  232;  its  former  fears  of 
"economic  invasion"  by  Asia 
and  the  U.  S.,  233,  234;  hard 
times  in,  after  Napoleonic  wars, 
236,  237;  economic  needs  of, 
after  this  war,  238;  future  atti- 
tude of,  toward  immigration  to 
U.  S.,  241. 
Export  trade,  of  the  U.  S.,  decrease 
of  at  beginning  of  war,  89; 
enormous  increase  of,  diuring 
1915,  128;  destination  of,  128; 
influence  of,  on  the  foreign  ex- 
changes, 153;  imHkely  to  con- 
tinue at  war-time  size  after  war, 
227;  predictions  as  to  character 
of,  on  return  of  peace,  239. 

Federal  Reserve  Law,  its  enactment, 
104;  its  provisions,  105-107; 
put  into  operation,  107;  its 
effect  on  financial  sentiment, 
108;  currency  issues  under,  15  s, 
156;  unexpected  character  of 
such  issues,  157;  possibilities  of 
future  inflation  under,  safe- 
guards against,  158;  future  in- 
fluence of,  on  American  money 


rates,  160;  importance  of,  to 
economic  future  of  U.  S.,  243. 

Fiat  money,  not  largely  resorted  to 
in  this  war,  73;  reasons  against 
using,  73;  wherein  currency 
issues  in  Europe  differed  from, 
147,  148. 

Foreign  exchange,  violent  movement 
of  in  1914,  against  New  York, 
92;  rate  of  $7  touched  for  ster- 
ling, 93;  economic  significance 
of  the  rate,  93;  turn  in  favor 
of  New  York,  123,  124;  Lon- 
don's view  of,  as  an  index  to 
prosperity,  133;  effect  of  Eu- 
rope's currency  inflation  on,  149, 
150;  premium  on,  in  1915  at 
New  York,  151;  violent  move- 
ments of  19 I 5  in,  163;  prin- 
ciples underlying,  165;  action 
of,  in  normal  times,  166;  effect 
of,  on  gold  exports,  166;  spec- 
tacular decUne  of  1915  in,  167; 
depreciation  of,  on  London, 
Paris,  BerUn,  Vienna  and  Petro- 
grad,  167;  causes  of  movement 
of,  against  London,  168;  against 
France,  168,  169;  how  affected 
by  return  of  American  tourists, 
168;  influence  on,  of  transfer 
of  capital  from  London,  169; 
effect  on,  of  $500,000,000  Anglo- 
French  loan,  173;  recovery  of, 
at  London,  177;  continued  de- 
preciation of,  at  Paris,  177;  con- 
tinuous movement  of,  against 
Germany,  178;  causes  for,  178, 
181;  influence  of  paper  infla- 
tion on,  180;  course  of,  in 
Napoleonic  wars,  181. 

France,  hoarding  of  money  in,  on 
eve  of  war,  26;  war  loans  of,  57, 
58;  absence  of  heavy  war  taxa- 
tion in,  72;  her  purchase  of 
American  securities  before  the 
war,  79;  her  economic  position 
in  the  first  year  of  war,  118; 


INDEX 


249 


asks  her  citizens  to  give  up  gold, 
122;  amount  received,  122;  in- 
flation of  currency  in,  145;  issue 
of  small  paper  currency  in,  161; 
depreciation  of  exchange  on, 
167;  causes  of,  168,  169;  co- 
operates in  Anglo-French  loan, 
170;  government  of,  buys  or 
borrows  foreign  securities  from 
French  investors,  176;  places 
$100,000,000  loan  at  New  York, 
176;  its  holdings  of  American 
securities,  177;  economic  con- 
dition of,  in  1915,  177;  views 
of,  regarding  terms  of  peace, 
18s;  her  position  in  relation  to 
other  states  before  the  war,  202; 
her  economic  weakness  during 
the  war,  203;  reasons  for,  204; 
her  rapid  economic  recovery 
after  other  wars,  205;  explana- 
tion of,  206;  economic  condi^ 
tion  of,  imder  Napoleon,  208* 
historical  origin  of  her  economic 
capacities,  209;  German  trade 
with,  after  Franco-Prussian 
war,  216;  predictions  of  her  re- 
lations with  England  after  Na- 
poleonic wars,  225;  probable 
nature  of  trade  with  U.  S.,  after 
war,  240;  question  of  future 
labor  costs  in,  240;  commission 
from,  on  international  trade 
after  war,  visits  U.  S.,  240. 
Franco-Prussian  War  of  1870,  cost 
of,  per  day,  9;  circumstances  of 
outbreak,  25;  economic  conse- 
quences of,  to  Germany,  195; 
trade  between  France  and  Ger- 
many, at  conclusion  of,  214; 
attitude  of  Continent  toward 
England  in,  232. 

Germany,  her  exactions  from  Bel- 
gium, 11;  money  hoarding  in, 
on  eve  of  war,  26;  threats  of 
XQii  against  France,  26;   war 


loans  of,  56,  58;  her  method  of 
raising  them,  60;  her  ideas  as 
to  financing  war,  68;  her  new 
taxes,  72;  her  success  in  raising 
war  loans,  119;  asks  her  citizens 
to  give  up  gold,  121;  amount 
collected  by  her,  121;  economic 
problems  of,  after  the  war,  161; 
depreciation  of  exchange  on, 
167,  178;  influence  of  blockade 
on,  178, 179;  effects  of  currency 
inflation  in,  180;  places  $25,- 
000,000  loan  at  New  York,  182; 
attitude  of  New  York  toward 
loans  of,  182;  her  government's 
attitude  toward  peace,  184; 
war  policies  of,  as  obstacle  to 
peace,  186;  her  government's 
attitude  toward  peace,  189;  her 
rise  in  economic  prestige  after 
Franco-Prussian  War,  195;  her 
allegations  as  to  cause  of  war 
in  1914,  202;  threats  of,  after 
1871,  regarding  France,  204; 
origin  of  her  economic  prestige, 
206;  effects  of  the  war  on,  206- 
208;  her  use  of  foreign  capital, 
207;  condition  of  her  currency, 
208;  her  military  preparations 
in  1 9 13,  208;  her  past  economic 
history,  209;  economic  prob- 
lems of,  after  the  war,  210;  pre- 
dictions in,  regarding  future  of 
England,  214,  215;  economic 
futiure  of,  English  threats  re- 
garding, 215;  trade  of,  with 
England  before  the  war,  216; 
with  France  after  Franco- 
Prussian  War,  216;  bitterness 
of  feeling  against,  217;  plans 
of  Allies  regarding  trade  with, 
after  war,  217-224;  future  of 
her  trade,  223,  224;  possible 
change  in  national  character  of, 
after  this  war,  226;  diplomatic 
clash  with  U.  S.,  229;  predic- 
tions of  German  authorities  re- 


2SO 


INDEX 


garding  industrial  situation 
after  war,  239;  question  of 
labor  and  wages,  239. 

Gold,  international  shipment  of,  in 
Napoleonic  wars,  13;  predic- 
tions of  19 14  as  to  international 
movement  of,  18;  actual  re- 
sults, 19;  $10,000,000  ship- 
ment of,  in  week  of  war  out- 
break, 21;  hoarding  of,  after 
191 1,  in  Continental  Europe, 
26;  hoarding  of,  at  London,  in 
August,  1 9 14,  34,  36;  export  of, 
in  1914,  by  New  York,  92,  94; 
use  of,  in  redeeming  New  York 
City's  European  loan,  100; 
payment  of  foreign  debts  in, 
diuing  war  panic,  loo;  French 
and  German  Governments  ask 
for  citizens'  holdings  of,  119- 
122;  reasons  for  premium  on, 
in  former  wars,  120;  reserve  of, 
against  England's  war  currency, 
146;  usual  movement  of,  in 
war  time,  147;  absence  of  pre- 
mium on,  in  this  war,  149;  use 
of,  as  security  for  oiu:  new 
Federal  Reserve  notes,  157; 
enormous  imports  of  in  1915, 
by  U.  S.,  157;  possible  re- 
export of,  to  Europe  after  the 
war,  159,  162;  Evu-opean  ac- 
cumulations of,  possible  use 
after  war,  161;  normal  influ- 
ence of  exports  of,  on  exchange 
rates,  166;  large  exports  of  in 
1915  and  1916,  by  London  to 
New  York,  170;  premium  on, 
temporarily  bid  in  Germany, 
180,  181;  premium  on,  in  1809 
at  London,  181. 

Gold  payments,  suspension  of  at  New 
York,  in  1 86 1,  5;  suspension  of 
in  1870  at  Paris,  33;  at  London 
in  1797,  33;  question  of  main- 
tenance in  19 14,  at  New  York, 
94-97;    how  maintained,   99- 


102;  question  of  their  resump- 
tion, by  Europe  after  war,  161. 

"Gold  pool,"  for  adjusting  New 
York's  foreign  obligations  in 
October,  1914,  100;  nature  of 
its  operations,  102. 

Government  bonds,  European,  rise  in 
price  of,  before  the  war,  28. 

Grain  crops  of  the  U.  S.,  enormous 
jdeld  of,  during  1915,  140;  all 
records  broken  in  marketing  of, 
140. 

Grey,  Sir  Edward,  British  foreign 
minister,  prediction  of  economic 
effect  of  war,  17;  declaration 
in  191 1  to  German  ambassador, 
26. 

Eelfferich,  Karl,  German  finance 
minister,  his  disapproval  of  war 
taxes,  68;  his  view  of  England's 
war  finance,  69;  predicts  down- 
fall of  British  Empire,  214,  215. 

Holland,  war-time  flow  of  gold  into, 
19. 

Immigration  from  Europe  to  U.  S., 
problems  of,  after  return  of 
peace,  241. 

Income  tax,  English,  in  Napoleonic 
wars,  6,  9;  circmnstances  of, 
in  1 9 14,  10;  large  increase  of 
1915  in,  70;  raised  to  25  per 
cent  or  higher,  70,  71. 

Indemnity,  war,  Germany's  predic- 
tions regarding,  68. 

Inflation  of  paper  currency,  its  occur- 
rence in  previous  wars,  144; 
in  the  American  Civil  Wal^^s ; 
in  the  beUigerent  states  during 
this  war,  145,  146;  nature  of, 
147,  148;  causes  of,  in  war 
time,  147;  effect  of,  on  foreign 
exchange,  149;  on  prices,  150; 
question  as  to  existence  of,  in 
the  U.  S.,  151-158;  effect  of, 
on  return  of  peace,  200,  201. 


INDEX 


2SI 


International  finance,  status  of,  in 
Napoleonic  wars,  12, 13, 14;  ex- 
pected results  of  war  on,  16,  17. 

Iron  prodticiion,  a  measure  of  na- 
tional prosperity,  137;  im- 
mense expansion  of,  during  1915 
in  the  U.  S.,  138. 

Japan,  economic  condition  of,  dur- 
ing Manchurian  War,  64,  65; 
American  loans  of  1904  to,  132; 
how  war  with  Russia  was  ter- 
minated, 190,  191;  depression 
in,  after  war  with  Russia,  195. 

Johnson,  Andrew,  President  U.  S., 
his  plan  for  repudiating  war 
debts,  66. 

KronPrinzessin  CecUie,  turns  back 
with  $10,000,000  gold  on  board 
at  outbreak  of  war,  21. 

Labor,  problem  of,  in  Europe  after 
the  war,  239,  240;  influence  on, 
of  futiure  immigration  to  U.  S., 
241. 

Uoyd-George,  David,  chancellor 
British  exchequer,  his  predic- 
tion as  to  economic  aftermath 
of  war,  201. 

London,  hoarding  of  capital  in,  on 
eve  of  war,  27;  beginning  of 
war  panic  in,  31 ;  sales  of  securi- 
ties to,  by  continental  Europe, 
31;  stock  exchange  closes,  32; 
financial  position  of,  at  war's 
outbreak,  40;  its  foreign  credits, 
41;  effect  of  moratorium  on, 
48;  investments  by,  in  new 
foreign  loans,  prohibited,  59, 
129;  predictions  of,  regarding 
outcome  in  America,  97,  129; 
sends  back  gold  to  New  York, 
124;  ceases  to  act  as  world's 
central  market,  129;  continues 
to  discount  for  outside  world, 
130;     foreign    deposits    trans- 


ferred from,  to  New  York,  131; 
normal  foreign  exchange  market 
in,  165,  166;  violent  break  of 
New  York  exchange  on,  167, 
168;  transfer  of  capital  from, 
to  New  York,  169;  gold  ex- 
ports of  191S  and  1916  from, 
170;  places  $500,000,000  Anglo- 
Frendi  loan  in  U.  S.,  172;  bor- 
rows $50,000,000  from  New 
York  bankers,  174;  sales  of 
American  securities  by,  in  first 
two  years  of  war,  175;  depre- 
dation of  exchange  on,  in  Na- 
poleonic wars,  181;  position  of, 
after  1815,  211;  question  re- 
garding future  position  of,  as 
world  money  centre,  212-214; 
reasons  why  position  may  be 
retained,  212,  214;  basis  for 
economic  primacy  of,  235. 
London  Times,  protest  against  peace 
with  U.  S.  in  1814,  225. 

Madison,  James,  President  U.  S., 
remark  on  neutrals  and  bellig- 
erents, 8. 

Manchurian  War  of  1904,  cost  per 
day,  9. 

"Minimum  Prices,"  fixed  in  1914  by 
N.  Y.  Stock  Exchange,  112; 
removal  of,  113. 

Money  market,  of  Europe,  in  year 
before  war,  27,  28;  of  U.  S., 
effect  of  Anglo-French  loan  on, 
173,  174. 

Moratorium  on  debts,  in  Balkans 
during  191 2,  46;  proclaimed  in 
England,  47;  terms  of,  47; 
effects  of,  48,  49;  expiration  of, 
in  England,  52;  recourse  to, 
by  other  nations,  52;  bad  effect 
of,  on  N.  Y.  market,  94;  gen- 
eral abandonment  of,  in  Europe, 
118. 

Morocco  incident  of  191 1,  financial 
effects  of,  26. 


252 


INDEX 


"Munitions  orders,"  placed  by  Eu- 
rope in  the  U.  S.,  126;  value  of, 
126;  not  the  main  influence  of 
191S  on  railway  traflSc,  139, 
140;  use  of  $500,000,000  Anglo- 
French  loan  in  pasang  for,  174; 
shares  of  manufacturing  com- 
panies in,  effect  of  peace  nmiors 
on,  189;  effect  of,  on  attitude 
toward  peace,  193. 

Napoleon,  war  indemnities  levied 
by,  11;  rejection  of  opponent's 
peace  proposals  by,  186;  Prus- 
sian demand  for  his  death  after 
Waterloo,  225. 

Napoleonic  wars,  analogies  with  this 
war,  5-8;  economic  conditions 
during,  11-14;  proportion  of 
war  costs  in,  paid  by  Englalid 
in  taxes,  71;  harvest  shortage 
and  price  of  wheat  in,  124;  ex- 
port trade  of  U.  S.  during,  127; 
depreciation  of  exchange  on 
London  during,  181;  problems 
of  1813  in,  186;  course  of  prices 
after  ending  of,  193,  199;  dura- 
tion of  economic  depression  fol- 
lowing, 197,  201;  character  of 
that  depression,  199;  economic 
recovery  of  France  after,  205; 
condition  of  France  during,  208; 
England's  financial  position 
during,  211;  prediction  of 
Anglo-French  relations  after, 
22s;  disputes  of  neutrals  and 
belligerents  in,  229;  Europe's 
attitude  toward  American 
"trade  boom"  in,  232;  large 
imports  by  U.  S.  from  England 
after,  235,  236;  hard  times  in 
Europe  at  end  of,  236,  237. 

New  York,  closing  of  stock  exchange 
in,  32,  80,  81,  82;  its  earlier 
ideas  of  "displacing  London," 
77;  experiences  of  i90i,'78;  of 
subsequent  years,  79;  war  panic 


in,  83,  84;  export  of  gold  from, 
at  outbreak  of  war,  92;  violent 
movement  of  foreign  exchange 
against,  92;  crisis  in  policy  re- 
garding foreign  obligations,  94, 
95;  its  chance  of  displacing 
London,  97;  effect  of  its  main- 
tenance of  payments,  98;  doubts 
over  Europe's  resale  of  Ameri- 
can securities,  109;  the  irreg- 
ular "street  market"  in,  no; 
takes  over  London's  functions 
as  world  money  centre,  129; 
provides  capital  for  foreign 
markets,  130,  131;  foreign  de- 
posits transferred  to,  from  Lon- 
don, 131;  its  foreign  loans  of 
1901,132;  movement  of  foreign 
exchange  at,  during  1915,  163- 
169,  177-180;  negotiates  $500,- 
000,000  Anglo-French  loan,  171; 
lends  $50,000,000  to  London 
bankers,  174;  lends  $100,000,- 
000  on  collateral  security  to 
France,  and  $250,000,000  to 
England,  176;  takes  $25,000,- 
000  loan  from  Germany,  182. 
New  York  City  loan,  placed  in  Europe 
before  war,  79;  difficulties  of 
repayment  in  19 14, 99;  method 
of  redeeming,  99-101. 

Ocean  freight  rates  during  war,  rise 
of,  227. 

Ocean  trade,  in  Napoleonic  wars,  13, 
14. 

"Orders  in  Council"  during  Napo- 
leonic wars,  analogy  of,  with 
1915,  7,  8. 

Panic  of  July  and  August,  1914, 
nature  of,  24;  at  Vienna,  29; 
at  BerUn,  30;  at  London,  31, 
34.  35.  36;  critical  nature  of,  at 
London,  39-42;  expedients  to 
allay,  43-50;  at  New  York,  81- 
85. 


INDEX 


253 


Peace,  discussion  of,  in  igi5,  by 
European  governments,  184; 
Asquith's  remark  on,  184; 
Bethmann-Hollweg  on,  184, 
189;  French  Government's 
views  of  1915  on,  185;  German 
Opposition  party  on,  185; 
**  Ford  party  "  as  an  incident  of, 
185;  world's  attitude  regard- 
ing, 186;  position  of  financial 
markets  regarding,  187;  ru- 
mors of,  in  191S,  189;  effect  of 
nunors  on  stock  market,  189; 
how  brought  about  in  previous 
wars,  190,  191;  conflicting 
views  concerning  conditions  at 
return  of,  1 91-194;  of  Paris,  in 
1763,  19s;  of  Westphalia, 
sequel  to,  196;  incidents  on 
return  of,  after  Napoleonic 
wars,  199. 

Pitt,  William,  analogy  of  his  subsi- 
dies with  this  war,  7;  his  in- 
come tax,  10. 

Poland,  Allies  pledge  future  eco- 
nomic assistance  to,  218. 

Predictions,  of  economic  results, 
before  the  war,  i,  16,  17,  18; 
of  result  of  war,  22;  of  previous 
economic  episodes,  233,  234; 
of  economic  sequel  to  the  war, 
237-240;  of  wages  in  Europe 
after  war,  239,  240;  of  economic 
future  of  U.  S.,  243. 

"Preparedness,'*  origin  of  the  Ameri- 
can movement  for,  3,  4;  anal- 
ogies to,  in  attitude  of  European 
Allies,  222;  nature  of  propa- 
ganda for,  in  military  field, 
230,  231;  in  economic  field, 
231. 

Prices,  of  commodities,  influence  of 
currency  inflation  on,  during 
our  Civil  War,  145;  coiurse  of 
in  Eiurope,  during  this  war,  150; 
in  the  U.  S.,  193;  action  of, 
after  Waterloo,  193,  199. 


Prussia,  her  situation  after  War  of 
1870  with  France,  195;  de- 
mand of,  for  Napoleon's  death 
after  Waterloo,  225. 

Railways  of  the  U.  S.,  sudden  in- 
crease during  1915,  in  trafl&c  of, 
139- 

Repudiation  of  Europe's  war  debts, 
theories  regarding,  66,  67. 

Richet,  Charles,  estimate  of  1904  on 
cost  of  a  European  war,  9. 

Roche,  Jules,  estimate  of  1913  on 
cost  of  a  European  war,  9. 

Rogers,  Thorold,  opinion  on  period 
of  reaction  after  Napoleonic 
wars,  197. 

Rothschild,  house  of,  its  origin,  11. 

Runciman,  Walter,  president  British 
Board  of  Trade,  his  prediction 
of  Germany's  condition  after 
war,  215. 

Russia,  cost  of  her  war  with  Japan, 
9;  depreciation  of  exchange  on, 
167. 

Servia,  Allies  pledge  future  economic 
assistance  to,  218. 

Seven  Years'  War,  economic  and 
political  results  of,  194,  195. 

Spain,  prosperity  of,  after  war  with 
U.  S.,  I9S. 

Special  holidays  during  London 
panic,  43. 

Sterling  exchange,  see  Foreign  Ex- 
change. 

Stock  exchange,  at  London  in  Napo- 
leonic wars,  12;  closing  of,  at 
Vienna,  Brussels,  Paris  and  St. 
Petersbiu-g,  in  1914,  20,  30;  at 
Berlin,  restricts  trading,  30; 
at  London  in  19 14,  sales  by 
the  Continent  on,  before  the 
war,  31;  loans  made  to,  31; 
closing  of,  31. 

Stock  exchange  at  New  York,  closing 
of,  in  1914,  32,  80;  why  neces- 


254 


INDEX 


sary,  81;  reopening  of,  82,  83, 
109-112;  precautionary  mea- 
sures of,  110,  112, 113;  advance 
in  prices  on,  after  reopening, 
113;  prolonged  rise  of  1915  in, 
134;  advance  in  bonds  on,  135; 
rise  of  "war  munitions  stocks" 
on,  19s;  imsettled  market  of 
1916  in,  230;  character  of  war- 
time speculation  on,  242. 
Sweden,  war-time  flow  of  gold  into, 
19. 

Tarif  policy,  of  England  after  war, 
221;  possible  substitution  of, 
for  ifree  trade,  235;  question  of 
use  of,  by  U.  S.  after  war,  235. 

Taxation,  Germany's  repudiation  of, 
as  war  expedient,  67;  in  Eng- 
land during  1914,  69;  English 
budgets  of  19 1 5  and  1916  for, 
70,  71;  proportion  of  English 
war  expenses  in  191 6  provided 
by,  71;  in  Napoleonic  wars,  71; 
Germany's  plans  of  19 16  for, 
72;  policy  of  France  and  Russia 
regarding,  72. 

Thackeray,  W.  M.,  on  relations  of 
France  and  England  after  Napo- 
leonic wars,  225. 

Thirty  Years'  War,  political  and  eco- 
nomic results  of,  196. 

Transvaal  War  of  1899,  cost  per  day, 
9;  efEect  of,  on  England's  eco- 
nomic position,  195. 

United  States  (see  also  Civil  War),  in- 
fluence of  war  on,  75;  economic 
relations  of,  before  the  war,  76; 
annual  indebtedness  of,  to  Eu- 
rope, 77;  predictions  as  to  effect 
of  war  on,  80;  gloomy  outlook 
of  1914  in,  88;  decline  in  export 
trade  of,  89;  crisis  in  cotton 
section  of,  90;  shrinkage  in 
home  trade  of,  91;  problem  of 


European  indebtedness,  92;  its 
wheat  harvest  in  1914,  125; 
enormous  exports  of  grain  from, 
125 ;  mimitions  orders  placed  in, 
by  Europe,  126;  its  exports  in 
Napoleonic  wars,  127;  in  the 
present  war,  128;  its  loans 
to  foreign  markets,  129-132; 
financial  and  industrial  pros- 
perity of  1915  in,  132-142;  ex- 
change of  bank  checks  in,  dur- 
ing 1915,  136;  increased  iron 
production  of,  during  the  war, 
137,  138;  large  railway  traflSc 
in,  139;  great  harvests  of  1915 
in,  140;  basis  of  its  war-time 
prosperity,  141;  its  traditional 
"cycle  of  prosperity,"  142;  its 
economic  dependence  on  Eu- 
rope before  this  war,  151,  152; 
previous  sales  of  securities  by, 
to  Europe,  152;  repiurchase  of, 
in  1914,  152;  absence  of  high 
money  in,  during  second  year 
of  war,  152;  conflicting  views 
of  war-time  prosperity  in,  153; 
proof  that  paper  currency  was 
not  inflated  in,  155-158;  de- 
crease of  paper  money  circula- 
tion in,  during  first  two  years 
of  war,  155-156;  enormous  im- 
ports of  gold  in  1915,  157;  sub- 
scribes in  191 5  to  $500,000,000 
Anglo-French  loan,  172;  lends 
$250,000,000  to  England,  176; 
economic  condition  of,  after 
Civil  War,  196,  197;  economic 
prestige  of,  after  1898,  203; 
reasons  for  and  against  its  re- 
placing London  as  the  money 
centre,  213,  214;  possible  future 
effect  on,  of  economic  war  by 
Allies  on  Germany,  221,  222, 
224;  war-time  prosperity  in, 
question  as  to  duration  of,  227; 
possible  European  competition 
with,  on  return  of  peace,  228; 


INDEX 


255 


probable  attitude  of  Europe 
toward,  after  the  war,  232;  pre- 
dicted "economic  invasion"  of 
Europe  by,  in  1897,  234;  in- 
crease in  imports  of,  from  Eu- 
rope after  181 5,  235;  predictions 
as  to  export  trade  of,  after  this 
war,  239,  240;  industrial  com- 
mission sent  to,  in  1915  by 
France,  240;  problems  of 
future  immigration  into,  from 
Europe,  241;  attitude  of  its 
markets  during  war,  242;  eco- 
nomic futvure  of,  243. 

Wages  of  labor,  after  the  war;  in 
England,  238;  in  Germany, 
239;  in  France,  240;  effect  on 
immigration  from  Europe  to 
America,  241. 

War,  the  European,  predictions  re- 
garding, 1, 16, 17, 18;  precedent 
for  economic  results,  4-8;  ex- 
pected cost  of,  9,  lo;  actual 
cost,  10;  its  outbreak,  20-22; 
financial  markets  on  eve  of, 
25-32;  financing  of,  S3-^i; 
world's  attitude  toward,  in  early 
months,  116;  events  of  191 4  in, 
117;  controversy  as  to  influ- 
ence of,  on  American  prosperity, 
141;  not  the  sole  cause  of  re- 
viving trade  in  America,  142; 


suggestions  of  1915  for  termi- 
nating, 184, 185;  influence  of,  on 
U.  S.,  187;  conflicting  views  as 
to  effect  of  its  termination,  188, 
191,  192. 

War  of  1 81 2,  demand  in  London 
that  it  continue,  225;  large  ex- 
ports to  U.  S.  from  England 
after  end  of,  236. 

War  loans,  in  England  before  19 14, 
56;  in  England  during  this  war, 
56;  in  Germany,  56;  in  France, 
57;  by  England  and  France  to 
their  allies,  57;  outstanding 
total  of,  58;  how  raised,  58-61; 
of  England,  during  i8th  century, 
63;  question  of  future  repudia- 
tion of,  66;  interest  on,  paid  by 
Germany  through  new  loans, 
72;  Anglo-French  borrowing  of 
$500,000,000  in  U.  S.,  170-174; 
French  borrowing  of  $100,000,- 
000  from  New  York,  176;  Eng- 
land's collateral  loan  for  $250,- 
000,000,  176. 

PF/fec/,  American  harvest  of,  in  1914, 
89;  effect  of  war  on  price  of, 
124;  in  Napoleonic  times,  124; 
world's  harvest  of,  in  first  year 
of  war,  125;  enormous  Ameri- 
can exports  of,  126;  influence  of 
blockade  of  Russia  on  market 
for,  195- 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


FEB  10  1935 


^f^   22  n?r. 


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MAR    12  1940 


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:C;r   13  1937 


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UNIVERSITY  OF  CAUFORNIA  UBRARY 


